Nearly everyone believes that oil prices will trend higher and higher, allowing increasing amounts of oil to be extracted. This belief is based on the observation that the cost of extraction is trending higher and higher. If we are to continue to have oil, we will need to pay the ever-higher cost of extraction. Either that, or we will have to pay the high cost of some type of substitute, if one can be found. Perhaps such a substitute will be a bit less expensive than oil, but costs are still likely to be high, since substitutes to date are higher-priced than oil.

Even though this is conventional reasoning based on experience with many substances, it doesn’t work with oil. Part of the reasoning is right, though. It is indeed true that the cost of extracting oil is trending upward. We extracted the easy to extract oil, and thus “cheap” to extract oil, first and have been forced to move on to extracting oil that is much more expensive to extract. For example, extracting oil using fracking is expensive. So is extracting Brazil’s off-shore oil from under the salt layer.

There are also rising indirect costs of production. Middle Eastern oil exporting nations need high tax revenue in order to keep their populations pacified with programs that provide desalinated water, food, housing and other benefits. This can be done only through high taxes on oil exports. The need for these high taxes acts to increase the sales prices required by these countries–often over $100 barrel (Arab Petroleum Investment House 2013).

Even though the cost of extracting oil is increasing, the feedback loops that occur when oil prices actually do rise are such that oil prices tend to quickly fall back, if they actually do rise. We know this intuitively–in oil importing nations, deep recessions have been associated with big oil price spikes, such as occurred in the 1970s and in 2008. Economist James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes (Hamilton 2011). Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007 (Hamilton 2009).

In this post, I will explore the reasons for these adverse feedback loops. I have discussed many of these issues previously in an academic paper I wrote that was published in the journal Energy, called “Oil Supply Limits and the Continuing Financial Crisis” (available here or here).

If I am indeed right about the path of oil prices being down, rather than up, the long-term direction of the economy is quite different from what most are imagining. Oil companies will find new production increasingly unprofitable, and will distribute funds back to shareholders, rather than invest them in unprofitable operations. In fact, some oil companies are already reporting lower profits (Straus and Reed 2013). Some oil companies will go bankrupt. As an example, the number two oil company in Brazil, OGX, recently filed for bankruptcy, because it could not profitably find and extract Brazil’s off-shore oil (Lorenzi and Blout 2013).

Oil companies will increasingly find that the huge amount of debt that they must amass in the hope of producing profits sometime in the future is not really sustainable. The Houston Chronicle reports that an E&Y survey of Oil and Gas Companies indicates that the percentage of companies that expect to decrease debt to capital ratios jumped to 48% in October 2013 from 31% a year ago (Eaton 2013). If companies with huge debt loads cut back production to the amount that their cash flow will sustain, oil extraction can be expected to fall–just as it can be expected to fall if oil and gas companies go bankrupt or give back investment funds to shareholders.

The downward path in oil production is likely to be steep, if oil prices do indeed drop. The economy depends on oil for many major functions, including most transportation, agriculture, and construction. Increasingly expensive to extract oil is a sign of diminishing returns. As we utilize more resources for extracting oil (oil, steel, water, human labor, capital, etc.), there will be fewer resources to invest in the rest of the economy, reducing its ability to grow. This lack of economic growth feeds back as low demand, bringing down the prices of commodities, including oil. It is because of this feedback loop that I believe that the path of oil prices is generally lower. This path is the opposite of what a naive reading of “supply and demand” curves from economics textbooks would suggest, and the opposite of what we need if the economy is to continue on its current path.

Suppose we calculate average US wages over time, by dividing “Total Wages” by “Total Population,” (everyone, not just those working) and bring this amount to the current cost level using the CPI-Urban inflation adjustment. On this basis, US wages flattened as oil prices rose, both in the 1970s and in the 2000s. The average inflation-adjusted wage is 2% lower in 2012 ($22,040) than it was in 2004 ($22,475), even though labor productivity rose by an average of 1.7% per year during 2005-2012, according to the US Bureau of Labor Statistics. Between 1973 and 1982, average inflation-adjusted wages decreased from $17,294 to $16,265 (or 6%), even though productivity reportedly grew by an average of 1.1% per year during this period.

Figure 1. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

To see one reason why wages might flatten, consider the situation of a manufacturer or other company shipping goods. The cost of goods, with shipping, would rise simply because of the cost of oil used in transport. Companies using oil more extensively in producing their products would need to raise prices even more, if their profits are to remain unchanged. If these companies simply pass the higher cost of oil on to consumers, they likely will sell fewer of their products, since some consumers will not be able to afford the products at the new higher price. To “fix” the problem of selling fewer goods, companies would likely lay off workers, to reflect the smaller quantity of goods sold–one reason for the drop in wages paid to workers shown on Figure 1. (Note that Figure 1 will reflect reduced wages, whether it results from fewer people working or lower wages of those working.)

Another approach businesses might use to deal with the problem of rising costs due to higher oil prices would be to reduce costs other than oil, to try to keep the total cost of the product from rising. Wages are a big piece of a business’s total costs, so finding a way to keep wages down would be helpful. One such approach would be a wage freeze, or a cut in wages. Another would be to outsource production to a lower cost country. A third way would be to use increased automation. Any of these approaches would reduce wages paid in the United States. The latter two approaches would tend to have the greatest impact on the lowest paid workers. Thus, we would expect increasing wage disparity, together with the flattening or falling wages, as companies try to hold the cost of goods and services down, despite rising oil prices.

The revenue received by businesses and governments ultimately comes from consumers. If the wages of lower-paid consumers flattens, these lower wages can be expected to reduce economic growth, because with lower wages, these workers will have less income to buy discretionary goods and services. The higher-paid workers may have more income, but this won’t necessarily feed back into the economy well–it may inflate stock market prices, but not feed back as spending on goods and services, necessary for growth.

There is even a feedback with respect to debt. The portion of the population with falling inflation-adjusted wages will find it harder to borrow, making it more difficult to buy big-ticket items such as cars and houses.

Adverse Feedback 2: Consumers cut back on discretionary spending because of the higher cost of food and oil, leading to more layoffs and recession.

Clearly, based on Figure 1, consumers cannot expect wage increases to match oil price increases. Even workers who work in the oil industry cannot expect wage increases equal to the increase in the price of oil, because part of the increase in cost comes from the need for more workers per barrel of oil. For example, it is more labor-intensive to extract oil from a large number of small wells, each of which require fracking, than it is to extract oil from a few larger wells, none of which require fracking.

One cost that tends to increase with the cost of oil is the cost of food (Figure 2). The cost of food and the cost of commuting are necessities for most workers. They will cut down on discretionary expenditures, if necessary, to make certain these costs are covered.

If wages are inadequate, workers will cut back in such area as restaurant meals, vacation travel, and charitable contributions, leading to even more problems with a lack of jobs in these and other discretionary sectors.

It might be noted that even countries that export oil can encounter difficulties as oil prices rise. These countries need a way to get the extra revenue from selling high-priced oil over to the many residents who must buy higher-priced food, but do not benefit from the wages paid to oil workers. It is not a coincidence that the Arab Spring uprisings took place in several oil exporting nations in early 2011, when food prices peaked on Figure 2.

Adverse Feedback 3: Higher oil and food prices together with stagnating wages lead to cutbacks in spending for new cars and new homes, falling prices for new homes, defaults on home and car loans, and banks in need of bailouts.

Purchasing more-expensive homes and new cars are types of discretionary spending. If consumers find their incomes are squeezed by high oil prices, they will cut back on expenditures such as these as well, leading to layoffs in the home construction and auto manufacturing industries. Such cutbacks can also result in bankruptcies of auto and home builders.

If people buy fewer move-up homes, the price of resale homes will tend to fall. This in turn makes defaults on mortgages more likely. Layoffs will also tend to make defaults on mortgages more likely, as well as missed payments on auto loans.

Most people do not associate the drop in US home prices with the rise in oil prices, but the latest rise in oil prices began as early as 2003 and 2004 (see Figure 2), and the drop in home prices began in 2006. Some of the earliest drops in home prices occurred in the most distant suburbs, where oil prices played the biggest role.

Banks increasingly found themselves in financial trouble, as defaults on mortgages and other loans grew. These defaults are often blamed on bad underwriting. While bad underwriting may have played a role (and may also have helped prevent the US from falling into recession even earlier, when oil prices began rising), the falling prices of homes created part of the default problem, as did job layoffs associated with higher oil prices.

All of these feedbacks led to a need for more government involvement–lower interest rates to try to hold the economy together, get spending back up, and raise home prices.

Adverse Feedback 4: Cutbacks in consumer debt combined with flat wages appear to have led to the decline in spending that precipitated the July 2008 drop in oil prices. Consumer debt still remains depressed.

Oil prices started falling in July 2008, and did not hit bottom until the winter of 2008 (Figure 4).

Figure 4. West Texas Intermediate Monthly Average Spot Price, based on us Energy Information Administration data.

What could have precipitated such a fall? Many people consider the bankruptcy of Lehman Brothers on September 15, 2008 to be pivotal in the financial crisis of 2008, but the drop in oil prices started months earlier. What could have precipitated such a steep drop in oil prices?

It seems to me that the real underlying cause was a mismatch between what goods cost (such as high food and oil prices) and the amount consumers had available for spending. There are two basic sources of consumer spending–wages and increases in debt. If consumer debt suddenly starts decreasing, rather than increasing, consumer spending can be expected to fall (especially if wages are not rising).

In fact, consumer debt did start falling at precisely the time that oil prices crashed. Mortgage debt started falling in the third quarter of 2008, reflecting a combination of falling home prices and mortgage defaults. As noted previously, both of these were indirectly related to high oil prices.

Figure 5. US Home Mortgage Debt, based on Federal Reserve Z.1 data.

Other consumer debt fell at the same time. Revolving credit (primarily credit card debt) hit a peak in July 2008, and began to fall (Figure 6).

Adverse Feedback 5: Even after high oil prices have been in place for several years, many governments find themselves trapped by the need for deficit spending and ultra-low interest rates to cover up problems with stagnant wages and inadequate demand for homes and cars at “normal” interest rates.

With the slack in consumer debt, US government debt soared (Figure 7). Governments in Europe and Japan found themselves in a similar bind.

Figure 7. US government publicly held debt, based on Federal Reserve Z.1 data.

Even as US Federal Government debt soared, it was not enough to fully make up for the cutback in debt elsewhere in the economy (Figure 8).

Figure 8. US Debt based on Federal Reserve Z.1 data.

How do governments get themselves caught in such a bind? Businesses can to a significant extent overcome their problems with high oil prices by laying off workers and finding lower cost methods of production. Individuals, however, find that the wage problems persist as long as oil prices remain high and businesses have the option of replacing their services with lower cost workers elsewhere. Globalization definitely makes this problem worse.

When workers have job problems, governments find themselves in the unfortunate position of trying to fix the situation by providing more unemployment benefits, food stamps, and disability benefits. Governments also find themselves with lagging tax revenue, because businesses increasingly are located in offshore tax havens, and workers’ incomes are lagging.

Adverse Feedback 6: Rising prices of oil have contributed to long term inflation. If oil prices start falling, this tends to create the opposite problem–deflation. Once oil price deflation starts, it may lead to a self-reinforcing debt default cycle.

Not all inflation is related to higher energy prices, but some of it is. This is one reason the US government sometimes gives an inflation estimate “excluding volatile food and energy prices.” Inflation over the years appears to be one way that a small amount of diminishing returns has fed into the economy.

The concern a person has is that deflation will tend to lead to debt defaults. Clearly lower oil and gas prices mean that oil and gas businesses will become less profitable, and loans in this area will tend to default. But loans related to other types of commodities may tend to default as well. There will also tend to be layoffs in these industries, and in surrounding communities.

Also, with deflation, the low interest rate policies of governments no longer have the stimulating impact that they would have without deflation. So governments will have to concoct negative interest rate plans, and see if they can make these work, to take the place of current plans.

One question is how effective today’s Quantitative Easing and ultra-low interest rate programs have been. We know that they have tended to blow bubbles in asset prices, such as stock market prices. But are ultra-low interest rates part of what allowed oil prices to re-inflate after the July 2008 drop? Certainly, they have helped hold up auto and home sales, and have supported oil drilling operations that rely heavily on debt.

To some extent, the current system appears to be held together with duct tape. It looks like it could fall apart on its own, or it could fall apart as governments try to reduce their deficits by higher taxes and lower spending (See Figure 7). Adding deflation to the combination would seem to be another way of making the current approach for covering up our problems even more vulnerable to collapse.

The frightening thing is that there is already some evidence that oil prices (and commodity prices in general) are starting to trend downward. The chart I showed in Figure 4 showed West Texas Intermediate (WTI) oil prices–a price that is often quoted in the US. On Figure 9, I show WTI oil prices alongside Brent, another oil benchmark. Brent reflects world oil prices to a greater extent than WTI price does. It seems to be showing a recent downward trend in world oil prices. To the extent that this downward trend in prices feeds back into inflation rates and makes Quantitative Easing work less well, this downward trend becomes a potential problem. Its effect would tend to offset the stimulating effect on economies that lower oil prices would normally have.

Oil and other fossil fuels are unusual materials. Historically, their value to society has been far higher than their cost of extraction. It is the difference between the value to society and their cost of extraction that has helped economies around the world grow. Now, as the cost of oil extraction rises, we see this difference shrinking. As this difference shrinks, the ability of economies to grow is eroding, especially for those countries that depend most heavily on oil–Japan, Europe, and the United States. It should not be surprising if the growth of these countries slows as oil prices rise. The trend toward globalization can only make this trend worse, because it gives businesses an opportunity to lower wage costs by outsourcing part of their production to lower-cost countries (that use less oil!). When costs are reduced in this manner, businesses are also able get the “benefit” of more lax pollution laws overseas.

We saw in Figure 9 that global oil prices seem already to be trending downward, as growth in countries such as China, Brazil, and India is faltering. At the same time, oil from easy to extract locations is depleting, and oil companies have no choice but move on locations where more resources of all kinds are required, leading to diminishing returns and ever-higher cost of extraction. The way I view our predicament is shown in Figure 10.

Figure 10. Our Oil Price Predicament. Over time, if we want to maintain constant oil consumption, the price consumers can afford tends to fall, while the price required by oil producers in order to earn a profit tends to rise.

Over time, in order to maintain constant oil production, the price consumers can afford tends to fall, because governments need to “take back” the huge deficit spending they are using now to prop up the system. At the same time, prices required by producers tend to rise, as the mix of oil production moves to more difficult locations.

While in theory oil prices could spike again because of rising demand of the less developed countries, it is hard to see how this price spike could be sustained. We would likely run into the same problems we had before, with more layoffs and plus credit contraction leading to a cutback in demand in the US, the European Union, and Japan. These users represent a big enough share of the total that their drop in demand would tend to bring world prices back down.

The problem this time, though, is that governments seem to be getting close to being “out of ammunition,” in trying to fight what is really diminishing returns of one of the major drivers of our economy. I don’t know exactly how things might play out, but experience with prior civilizations suggests that “collapse” might be a reasonable description of the outcome.

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About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.

Shell recently announced that it was pulling out of unconventional oil, and it could only have been because it didn’t look profitable enough. Chevron quit last year. So why are banks still keen to lend to the minor oil companies to keep on fracking? Well, considering the massive propaganda exercise by USG hailing a new energy boom and the end of the Peak Oil myth, maybe USG/Fed/banks think those loans have done their job already, even if they subsequently have to be written off. After all, the Fed can always print more money.

The bond market is rigged. The stock market is rigged. The gold market is rigged. The housing market is rigged. Why not the unconventional oil market too?

Lack of analytical thinking and excessive optimism are behind most of these problems. Also, a desire to make the future look profitable. I am not sure that people are intentionally trying to deceive, but it does come out looking that way.

The Nikkei has gain 1480 point in six days. It means about 10 % on a six day period. This is what you get on a really good year in a normal functioning stock market. The end is approaching really fast. Here are some of my guesses about what could happen:

They are actually printing money. If this keep going, there are risks that people start questioning the stock market values. People lose confidence in currency international trade stop, we all died.

They are actually printing money. They keep printing until the money has barely any value. People lose confidence in currency international trade stop, we all died.

There is a bubble. The bubble blows, we enter in a big depression people lose confidence in financial market and political elite. International trade stop, we all die.

The government come out and admit there is a problem and admit they are insolvent. Freeze bank account. Social chaos ,violence infrastructure go down, potable water go down we all die.

Once the confidence in currency vanish, so does the mean to do international trade.

This link below summarize what has been in the lass few day on the stock market.

Yes you are right, the army will deliver diesel to the 1000 municipalities in Canada without problem.
Nobody will try to steal these trucks.

During the ice storm in Quebec. Montreal almost run out of water because they were no electricity at the water treatment plant. . The diesel cannot run water treatment plant at full production capacity.

“Montreal came very close to disaster in terms of the water supply,” Bernard said. “I am not sure we are prepared for a situation where Montreal would be hit for two or three days without power. . . . This was not in our state of mind. . . . I am sure that all the way from Hydro-Quebec to cities and governments there will be a major look.”

A near catastrophe at the peak of the recent crippling ice storm was avoided when power to Montreal’s water filtration and pumping system was restored after being cut for hours – a situation the city would have been ill-prepared to handle, local economists and officials said last week.

If electricity had not been restored to the system that evening of Jan. 9, residents of Canada’s second-largest city would have been without potable water, and firefighters would have been powerless to battle any blaze that might have occurred during a widespread electrical blackout.

That would have forced officials to consider either evacuating the city or moving residents to facilities like Olympic Stadium, where water could be delivered by truck, said Jean Thomas Bernard, an economist at Quebec’s Laval University who has been monitoring the province’s response to the ice storm.

Fortunately, the city’s one remaining link to the provincial electric grid held, and Hydro-Quebec was able to restore power to the filtration system after about two hours, and to the pumping station after about 10 hours on that Friday night. Even so, city residents were told to boil water for the next two days to kill any bacteria that might have entered the system while the electricity was off.

Bernard said that even though the storm was a once-in-a-century event, it will force provincial, municipal and power company officials to rethink their disaster plans and prepare for the possibility that a major city like Montreal could be stranded without basic services.

The water plant has no backup generator or power supply because, as a priority customer of Hydro-Quebec, officials assume electricity will always be available.

“Montreal came very close to disaster in terms of the water supply,” Bernard said. “I am not sure we are prepared for a situation where Montreal would be hit for two or three days without power. . . . This was not in our state of mind. . . . I am sure that all the way from Hydro-Quebec to cities and governments there will be a major look.”

Already, Hydro-Quebec, one of North America’s largest utilities and a mainstay of the province’s economy, has proposed a $500 million plan to add more distribution lines around the city and redesign some of its larger towers to withstand the type of storm that punished the area for four days.

“If you look at what has happened in recent meteorological changes, obviously [the power grid] is not secure anymore,” Quebec Premier Lucien Bouchard said Wednesday.

The system crumpled under the weight of the ice, as tens of thousands of poles and hundreds of towers and pylons crashed and bent.

The end may finally be in sight for the thousands of Quebecers who struggled through their third powerless week. Hydro-Quebec estimates that customers still without power in the stricken Monteregie region south of the city will have at least temporary lines by early this week.

Permanent repairs will take months. Damage has been estimated at about $1.5 billion, a quarter of it done to the power systems in Quebec and eastern Ontario and the rest divided between damage to personal property and lost business and production. That makes it the most expensive storm in a country with no shortage of natural calamity, including two major floods in the last 18 months, one in Quebec and one in Manitoba, and deadly avalanches in British Columbia and Alberta.

The ice storm losses include animals frozen to death on dairy, chicken and fish farms, a maple sugar industry that might lose as much as 30 percent of its production because of tree damage, thousands of cars dented by fallen branches and major industries that shut down assembly lines as they lost power and later, ran out of parts.

Bernard said the analysis provoked by the crisis will go well beyond any study Hydro-Quebec might do on how to strengthen its power distribution system. Plant managers, for example, might challenge accepted wisdom about producing “just in time” for delivery, having been reminded their supply of parts and raw materials is vulnerable.

We don’t realize how dependent businesses of all kinds are on having a functioning electrical grid.

I know the tour guide for one city we visited that had been restored to its look in the Middle Ages said that back at the time it was built, buildings had to be rebuilt on average once every twenty years, just because of fire. And this was with strict rules about how fire could be used.

I get depressed when I read the stories about how much you are supposed to have in your 401k saved for retirement…I have very little saved. People excited about it and looking with scorn at those who have not participated in it early on. I can’t with good confidence put any money in it. But sometimes I feel like I am a bad citizen for not doing so. I am 38 and if the system crashes……. well I will look smart….if it doesn’t I will have to die young I guess. I worry about the danger of “group think” on the doomer sites but there is also “group think” going on on the other side as well…..”if you are not an optimistic person about the future, well you are just not living life” ….I guess with a crash it is hard to sit on the fence. Was listening to a history lecture the other day about WWI and how on the eve of war England did not want to enter this war because they did not want to disrupt financial markets they were so out of touch with reality like a Frenchman worried about the flowers in front of his building….little did they know what was really going to happen….I believe if we go down this hole the world is going to look a whole lot different!! I guess we have the same genes still floating around and people are not that good seeing into the future….At least there are many places for us “Cassandra’s” on the internet. Unfortunately a lot of people will lose their minds and more…..

Maybe you should be happy you haven’t put the money in your 401K plan. It is not at all clear that financial instruments will be worth very much in the future. If debt defaults, and debt is behind the money you have, you are just as well off not having it in your 401K.

Hello, What Gail said below may be true about those 401K’ s loosing value during a financial crisis. In 2008 before I retired from the courthouse tax office I had spoke to a woman that had 401k in Lehman and lost it all. I retired at 50 which I feel fortunate, if I had stayed another 5 years I would have gotten ten percent more, but the five years was more valuable to me so I had do with just a little less ,but no regrets. As you get older a home becomes more and more important something that you will be able to establish yourself in and also with neighbors.

Maybe better to buy that small old house on a place with hopefully some land to farm next to a creek or fresh water of some kind, something tangible. And hopefully you could get it paid off so it would really be yours. And, make sure it is a place you would like to live and perhaps retire to someday if not possible now.

I would rather own a title to something like that than a promise of a complex financial instrument that is invested in things that could go down the drain.

I also like gold and silver instead of cash on hand, but it is good to have a small amount of cash on hand aside from food and everyday items to last say 6 months would be good, but hard to do.

Hi Jan, that is the hard part, all our kids want to be in the city and the closest one is in Vancouver WA which is a couple hours away. My son just had a baby last week. But they visit but are close enough to help manage the farm. If things get tough some cities where they live some of them may come home sometime. My other two kids are in CA. My daughter had a chance to transfer up here to live with us awhile with a bank she works for but she is now in San Francisco as not enough excitement happening around here in the small town world. Many young people think their answer lies in the city which I believe may not be the case in the years ahead. Many city dwellers may not be suited for country life, both culturally and physically. I have visited some large cities and noticed people exercising and many looked fit but they so dependent the system which seems to be getting larger and more complex by the day and unstable.

When we made the choice to move to Oregon we had to leave the area where a few of family was but up here I do large families with kids helping out, but for us we will probably have to do for our selves.

I do log about ten miles per week on my tread mill which helps me keep up with my strength and try to eat well which helps too.

So we using the the raised beds for now with plans to get a few farm animals if needed but for now just veggies. But here in Oregon I have found many helpful young people that will work fair wages if older and need some help. I do not do roofs anymore and have been buying green wood, but I could really do these things if I had to. I think if things do harder we will all find ourselves pushing our limits we can do more if are faced with challenges.

“As we utilize more resources for extracting oil (oil, steel, water, human labor, capital, etc.), there will be less resources to invest in the rest of the economy, reducing its ability to grow. This lack of economic growth feeds back as low demand, bringing down the prices of commodities,”

I have a different understanding of this. As more resources are diverted to energy production, supply of resources for other commodities decreases. This results is a shift of the supply curve to the left, which will raise prices for other commodities. Resource scarcity is not affecting demand. Resource scarcity affects the availability of resources for others products, driving the cost of those products higher.

Higher prices may result in a demand shift to the left as well; that is a decrease in demand, lowering prices but also lowering the quantity consumed. This would be a ping pong reaction causing contraction.

The problem comes on the payment side of the equation. Workers whose wages are falling and who have less access to debt have a hard time paying more for much of anything. Businesses depend on workers to buy their products, so their sales tend to be weak as well.

Economic models are not set up considering diminishing returns, so they don’t handle the current situation. The model is only right in the imaginary economic world with unlimited resources.

Let’s take the imaginary situation where oil production takes 99% of the resources, and 99% of the workers. The 1% of the workers aren’t going to produce very much, with the remaining 1% of the resources. The total output of society will be equal to (the oil produced) + (1% of regularly produced other goods and services). Society as a whole will be a great deal poorer, since the output that society must share is much smaller than previously. Maybe your model makes wages go up — wages really should drop with the huge drop in oil “productivity”.

Sorry for the triple flag here, the other doomer post was a liiiittle bit too dark in my eyes.

Theoretically, in an industrial only society, one without the service and suburbia economy shenanigans, the 1% could produce just the same amount with robots and all. The problem is that we didn’t shift away from labor at all and this bites everyone now. If the economy decentralized for essential goods four decades ago, more would just fall out of the demand side by being more resourceful with what there is locally. Some call it euphemistically transition (towns). The remaining, highly efficient part in the double sense would take over the distribution and production of the industrial goods like washing machines, stoves, pumps and grid/Internet devices, etc. Theoretically, I wrote. Because planned obsolescence is exactly one of those so called innovations that block a sane development.

I think that we get to the same place. But resource scarcity will result in higher prices. Prices will creep up until they bump up against the constraints imposed by the lack of purchasing power on the demand side. People won’t have the money to purchase goods that are so expensive. The rising prices of commodities, due to scarcity, causes a shift in the demand curve to the left, to lower consumption. This will simultaneously lower prices and consumption. As the demand curve continues to shift left and prices drop along with consumption, a new equilibrium will be reached with supply. Eventually this equilibrium will begin to break because of continued resource scarcity, which will result in new supply shifts to the left, towards less production. This shift will bring about a new rise in prices that will eventually be brought in check by contraction represented by another leftward shift in the demand curve. The process continues, bringing about a prolonged contraction.

Absent a catastrophic financial crisis, which could easily be triggered by the periods of recession caused by escalating price increases from resource scarcity, I foresee a bumpy road of continued contraction. I cannot predict the timeframe of this contraction, but the recessions and eventual decrease in consumption will come from price increases induced by competition for ever more scarce and valuable resources.

In the natural world, there are a lot of things that work as waves–sound waves, the trend in the population of a given animal over time when competitors are around, the path a point on a moving wheel makes. What we have had to date has been price spikes and recessions, sort of like parts of waves. I suppose we could have a situation where the supply demand-balance is moving downhill, but in wavy pattern, related to a temporary price increase, and then a collapse back down.

How long the pattern lasts depends on how severe the effect of a step down is, and how big an upswing can be made. Also, how resilient the whole system is.

I am concerned about a near-term down step because of the poor financial condition of governments.

Reduced consumption that will not recover is the real killer here for advanced economies and banks: in Spain for instance power of consumption has fallen at least 30% for average people including pensioners.

One of the big Spanish companies making domestic white goods has just folded: their sales (mostly in Spain) had fallen by about 60% since 2008 and the collapse of the property bubble.

Retail sales will just worsen, and bad loans will inexorably rise (just look at European figures) from an already high level.

Hello Xabier, I think conserve the resources we have left with so many of us to feed and clothe etc. – the key would be if we could restructure and economy somehow geared towards lower consumption. This would be a situation where companies expect lower sales each month which we all know our current system would collapse under that as it is geared to sales increases. One of my early jobs as a young man was a small retail store manager and the corporate office expected 3-5% sales growth annually and if they did not get it they were very happy indeed. This goes in the opposite direction of greed which seems to run things now. I guess most of us would agree that the corporate world would embrace such a strategy to preserve the population and what resources are left.

I guess that is very unlikely so we will eventually see collapse, but I do agree higher prices for scarce items come first before severe recession and then perhaps lower prices but few will have funds. Gas is still pretty cheap at $3 so this seems a ways off unless some black swan event hits. Xabier is the unemployment going up still in Spain?

It won’t take very much to cause collapse. For example, if interest rates rise very much, it will cause financial repercussions of many sorts. The amount of interest the US government owes would start increasing, leading even further for a need for higher taxes. The number of people able to afford homes and new cars would drop, so home and car sales would drop again. Home prices would drop again, because there would not be enough people in the market for move-up homes. There would be more defaults on loans and more bank failures. Governments would be less able to bail banks out this time.

Almost any way of attempting to unwind Quantitative Easing looks likely to raise interest rates, causing the problems noted. QE can’t go on forever. It is simply blowing bubbles. See the WSJ editorial, Janet Yellen’s Greatest Challenge.

There are of course many other things that could lead to collapse. The collapse of the Eurozone could have worldwide ramifications, for example. Not being able to come to a debt ceiling agreement could be an end-point. Even Obamacare could push the country over the brink, in terms lower spendable income because of mandatory health coverage. A major shakeout in the oil and gas industry, because of financial problems due to low prices could also lead to collapse. We are sitting on the very edge of collapse right now. The fact that this is not visible to some people does not mean it is not there.

“Let’s take the imaginary situation where oil production takes 99% of the resources, and 99% of the workers. “

Reminds me on Agriculture some hundred or thousand years ago. Basically all where involved in producing “plant energy” – with little spare capacity for other professions.

Due to usage of external energy (wood, coal, oil) and technology plus efficiency improvements productivity went up, so that less and less people where concerned with energy production.

Now we face the first time in the human development a “global” reversal of that development. Previously such where local phenomena – caused by depletion of natural resources, to much growth and diminishing returns by the added complexity to code with occurring problems (see also Tainter). It will be interesting how this all plays out.

Further down you asked for solutions.

The only one I have to reduction of system complexity and wasteful work! Currently we produce to produce, not because some one needs the stuff – but to grow. We pre-plan obsolence, try to sell products no body needs with advertisement and marketing. All this cost – no, wastes! – precious resources for no real purpose (i.e. “net happiness”).

Until we stop that – there will be no reversal in the development. What has foremost to change is our concept of credit based money that requires growth. While credit based money is a perfect system and works as intended to maximize development, competition and expansion – it doesn’t work where there is no more room to expand to.

And even when this debt based money works – the one which takes on debt is forced to somehow get the money to pay back the debt – otherwise he looses everything (or at least a lot). Quite a huge ‘motivation’ to do a lot of (sometimes bad) things.

Therefore I also see ideas as SSP (Space Solar Power) very ambiguous. As technician I can see the real potential and high EROEI – but it requires a high system complexity that supports it – and decade long advance financing and risk taking. That I think is only available on a government driven society-level (e.g. the Apollo Mon program) – but not anymore on a pure commercial one.

You are right. Agriculture did take a huge share of the resources. The Great Depression occurred in the US at the time that the economy was trying to absorb all of these excess farm workers into the fossil fuel industrial economy. It wasn’t until we learned to ramp up demand with war and lots of debt that we were able to make the transition. After the war was over, rebuilding, plus even more debt, helped speed the recovery along.

Hi Gail:
World War II was one of the most significant pivot points in history, not merely for the technologies it spawned, but for the social, economic and political changes it wrought. One of the most important was the ramped up use of petroleum, as depicted in one of your earlier charts. It shows that the strong growth climb began in the 40s and continued through the 70s before flattening due to OPEC, then Iran and the recession of the early 80, only to resume again until Saddam Hussein became over-enamored with Kuwait.
Another measure is population: when Japanese bombs hit Hawaii, Washington DC’s population was less than 50,000, and the overall region was about triple that. By 1945 the population of the general region was about a million, and it kept growing. Military contributed much — about half — but winning a cold war takes more than soldiers…
We’re still paying for it — and more each year.

My only quibble would be on what the flattening in the 70s was due to. I would say it was due to US oil production dropping, and the rest of the world not keeping up. OPEC took advantage of that time, but it basically our shortfall that gave rise to the drop. The countries that were using oil also scurried around trying to pick the low hanging fruit when it came to saving oil, after we discovered oil was not so plentiful. We started importing some smaller cars from Japan. We also shifted oil fired electricity production to other sources–coal or nuclear. This helped reduce oil consumption in the late 1970s and early 1980s.

@ Gail — Re your question about 70’s Flattening. Kennedy confronted a recession in 62-63. He was fiscally conservative but his successor was definitely not. Note the big jumps in US budget in second half of 60’s. Funding the Southeast Asia War Games
(US-0, Locals-3) tightened the budget even more. Note that by 1970 Nixon had to take the US off the gold standard. That was due to fiscal profligacy more than anything, ma’am. At least that’s what we thought then.
Cheers, Chris

When oil prices rise, the higher prices lead to lay-offs. These lay-offs never are fully taken back, even with government deficit spending and low interest rates–something we are experiencing now. This lack of wages keeps demand low, and thus prices lower than they otherwise be.

Also, apart from oil problems, we have globalization and also competition with computers and machines to do the work humans are doing now. These substitutes for human labor also keep wages down.

So what happens when the fuel for those machines becomes too expensive? Will they hire people to do the jobs that can no longer be done by robots/computers when the lights go out?
Or will people be forced back onto working the farms if they want to eat?

Unfortunately there are too many people to be fed with just organic farming so many people will still starve even if able and willing to work.

After the collapse of the current “civilization” people will be needed to make what we actually need not just “stuff” like today. Many skills will need to be relearned, that’s why we need to protect those books and people who know the old skills so they can teach others.

Too many amerikkkans are still in the dark about what’s in store for us & believe the corporate “news” that amerikkka will become the new Saudi Arabia in the future able to export oil & natural gas. Fools!

“Unfortunately there are too many people to be fed with just organic farming so many people will still starve even if able and willing to work.”

We can feed everyone using “organic farming.” What we cannot feed them without are tractors.

Everyone is going to be much more involved with providing their food than simply exchanging little bits of coloured paper. I just harvested over 80 kg (170#) of peppers, and my whole body hurts. Now I have to go try to compete with huge, oil-soaked operations. Luckily, the grocers on our island strongly support local, and I can count on getting perhaps 1/3rd more than they pay for peppers from California.

The point is: get more involved with your food. If you’re planning to relocate, I would count “support of locals by locals” as the #1 thing you should be looking for.

Gail, you keep touching on the core economic and financial problem without actually discussing it.

Above you say “Businesses depend on workers to buy their products” and in the post you say “The revenue received by businesses and governments ultimately comes from consumers.”

Underlying these statements is an inescapable fact. The aggregate of all consumption is retail and the aggregate of all consumers is the aggregate of all employees. But the aggregate of all wages/salaries paid is only a portion of the aggregate of all retail prices.

Therefore, the portion of retail price that represents wages paid is supposed to equal the total of all prices paid. This is a logical and mathematical impossibility.

Until now the difference has been made up with debt on the basis that, for every individual, the possibility exists that they CAN earn enough in a lifetime to pay off the debt. But it mathematically cannot be so for the aggregate of all consumers. Which is why, in the ancient world, there needed to be a regular jubilee to remove the excess, and destructive, debt from the system – something akin to the Social credit idea BTW.

The difference netted out is 1) profits on production and 2) cost of/profits on money borrowed to finance production, especially growth. But now, even if both of those were removed from the equation, we would still be left with resource depletion and rising costs of extraction and a shrinking economy.

But instead we have ALL of these factors multiplying each other and zero plans, or inclination, actually to deal with any of them in a mathematically viable way. Or, to put it bluntly, we are screwed. Really screwed.

I agree with the general idea. I think that there may be businesses buying from businesses, and their debt involved as well.

I talk about this issue and give some charts it this post: Reaching Debt Limits. This is a chart related to per capita income, plus debt change from that post:

The huge increases were during the go-go days of rising home prices and people refinancing their homes to pull out the equity and buy other “stuff”. I haven’t updated the chart recently. I know that apart from rising student loans, debt carried by households hasn’t increased by much recently. The buy-up of homes has been by commercial organizations, intending to rent them out and eventually sell them at a profit.

I think the business debt thing is a slight trap. The business expects to sell the house or rent it at a profit – to a retail buyer. Just as taxes are simply an extra step that leads to retail spending – every dollar quickly finds it way into pockets, be they public servants or road contracts or military hardware.

The key problem is that, through bank-created fiat debt money, the banks gain an increasingly large share of the money in circulation. This money doesn’t belong to any ONE, it becomes an autonomous entity that seeks to earn new income in its own right, through surplus lending that generates new interest income. That and taking on ever greater risk leading to absurd investments.

Once you net out the retail pathways, you are left with 2 unsustainable, and destructive demands on the economy, interest and retained profits, both of which are unearned (as in not generated by productive effort) and therefore a drag on the entire economy.

As the Pope appears to have realised, capitalism, and interest-bearing debt, ARE the problem to which the only apparent solution has to be total collapse.

I only got a little way through your paper. I thought Hotelling’s work had be shown not to be valid in real life because it misses diminishing returns. The first part of the resource is removed at little cost, and extraction cost increases as the site moves to secondary and tertiary extraction techniques, that are slower and use more energy. But I don’t remember if that was a paper, or an e-mail discussion.

You talk about the extent of economies of scale. The area that seems to me to be a big issue is the diseconomies that come with lack of scale. For example, the cost of distributing electricity over transmission lines is close to the same, regardless of how little fossil fuel is electricity is so transmitted. Current pricing schemes give intermittent electricity generators (wind, solar PV, waves) far too much credit for the electricity they generate, relative to the value they provide to the electric utility. The value of the electricity generated by the intermittent renewable is roughly equal to the fossil fuel saved, while the credit is typically many times higher. As a result, the likely path intermittent renewables lead us on is one toward bankrupt electric utilities–either that, or consumers with high surcharges. You probably have heard about all of the problems in Germany–the huge financial losses of the electric utilities, and now the big layoffs that are occurring. http://www.euronews.com/2013/11/14/rwe-is-latest-european-energy-firm-to-cutback/

The feed-in tariffs and the issues that they have caused are a big topic in German politics and public discussion. The guaranteed feed-in tariffs are payable by the electricity consumers – and huge ‘Industrial’ consumers are exempt. Many of those who can afford it invested in PV or other renewable installations – either at their home of via funds. So especially the “have-nots” have to pay the bill, since they do not have PV installations or money in ‘funds’.

While Germany still may have a minimum net on social welfare, that pays some amount for accommodation and the heating bill – the electricity bill has to be payed from the 382€/Month (approx. 500$) that one person become for “all the rest of the living expenditures including food”. And even if you become that – you can be forced to accept ‘societal beneficial’ work for 1€ the hour or ‘real’ low-wage jobs that even make US low-wage earners high-income ones (this all depresses the German consumer and is part of the causation of the German ‘export strength’).

Thank you for that rather sobering assessment of our predicament, Gail. I really can’t see BAU continuing much longer on the basis of what you say. Only a universal debt jubilee coupled with a radical re-evaluation of the global economy – which, let’s face it, are not going to happen – might pull us back from the brink.

Perhaps there are other ways of looking at the situation.–I very often learn things from my commenters and from those who write to me.

I am not certain that a debt jubilee and radical re-evlaution of the global economy would really fix the situation, either. We need to move to a model which is very much downscaled from where we are today. Perhaps local economies using local resources, without electricity or fossil fuels.

I agree that a debt jubilee for the masses may not work, the one given to the banker set has already failed. The biggest problem is that the masses are paying for the banker giveaway and will get nothing for the money.
Nothing will be resolved till the banking system is nationalised and bought under control. The banks claim they are too big to fail, and that we need to assist them.

But they are still getting bailout cash after 5 years, which means they have failed already and no one wants to admit it.

Thanks Gail for your excellent efforts at educating. It is a bit of a curiousity that the real issue (well, among several) is the declining energy return of our energy sources, but the problem is almost always expressed in our surrogate for energy return, which is monetary value. Energy return is definite physical quantity while monetary value is a psychological phenomenon. It’s strange that we have some understand of money (which is a abstraction) but almost none when it comes to energy–which is the real currency of life.

I have looked at both Energy Return On Energy Invested (EROEI) and financial cost, and have come to the conclusion that financial cost is a much better indicator than EROEI.

For one thing, EROEI is simply a measure of how, using current systems and measurement conventions, the amount of energy out compares to the amount of energy in, at the “well-head,” with no adjustment for timing or intermittency. I find this measurement to be of little value in deciding which sources of energy to emphasize in the future. It tends to give the false sense of belief that a person can change one kind of energy to another–something that is not true. The timing aspect turns out to be very important, as are distribution costs and intermittency. None of these are considered in EROEI.

There also seems to be a built-in belief that somehow, one can operate an economy on a chosen mix of energy resources. This is not at all true. Wind and solar only work in a system that has a large amount of fossil fuels. Nuclear also requires fossil fuels.

We need to figure out what to do going forward, but I see EROEI as having little value in that decision. (It might help a person choosing between Wind turbine A and Wind turbine B, but that is not the decision we are making here. It is also helpful as a teaching too-to explain why energy supply can’t grow endlessly, and to illustrate the fact that, over time, the amount of energy inputs required for a given energy source tends to grow.)

Financial cost at least more representative of the true situation–an energy source needs to return all costs, not just energy costs. Different types of energy have very different value–intermittent electricity is of much less value than oil. Timing is important. So are indirect costs–the taxes that governments of oil exporters require in order to keep order in their countries for example. I think a lot of bad decisions have been made based on EROEI estimates.

I just finished Richard Heinberg’s book on the Fracking situation and he mentions someone who uses EROI rather than EROEI (Forget the guys name and don’t have the book with me) But EROI is Energy Return on Energy INVESTMENT. So instead of looking at the enrgetics involved it looks strictly at the monetary requirements/investments.

I don’t think there is a practical difference between EROI and EROEI, at least as used by Heinberg, Hall, Murphy, and others in the peak oil community. They have to do with energy investment. As a practical matter, this is often calculated using dollars.

It bothers me that the calculation explains such a small fraction of the total energy investment required for a product–in other words, we have to have roads, and schools, and many things that are not included, as well as a financial system. Debt is also not considered, even though there is a cost of interest involved, and that interest is eventually used to pay someone’s energy bills.

Computing ERO(E)I on a macro level is to complicated, yes. But understanding that micro entities like energy businesses need a certain EROI to keep going is important, because if a lot/most of the companies getting the energy to market stop doing so the macro consequences are formidable.

These same companies with low EROIs are also ones that are prone to financial failure, without government subsidies and super low interest rates. There are really two kinds of failure (1) system failure that we are reaching now. It relates to young people not having jobs, and governments not being able to collect enough taxes, and (2) failure of individual companies, that can be hid with subsidies and super low interest rates.

We don’t have good thresholds for EROI being too low, except that it is now clear that overall EROI is too low, because of the system problems we are reaching (low jobs, government funding problems). Because of the way EROIs are computed, I am not a fan of comparing the EROI of one type of energy with another. I do not consider the EROI of intermittent electricity to be equivalent to those of steady electricity. I also do not consider additional electricity to solve our oil problem, so in many ways the EROI comparison is irrelevant.

We know diminishing returns have been what has caused societies to collapse before. This is equivalent saying that falling EROIs caused civilizations to fail in the past. We need energy sources with EROIs of 50 or 100 to pull us out of the mess we are in today. None of the renewables that are currently being considered are near this level. They also must work with today’s vehicles, so we don’t have to rebuild the whole fleet, because there is a huge amount of energy invested in the vehicles and batteries. Much of our energy goes into infrastructure that is harder to economize on, such as roads and bridges. Cars without roads and bridges don’t work well.

I can’t find the discussion i once read in comments about the active bringing about of a mass die-off of the human population of about 90%. Seems monstrous, of course, but if it the notion that we have way outgrown our petrie dish once oil is out of the picture has occurred to the goodhearted likes of yourself and the commentors here, it has occurred to machiavellian elites as well.

I’m going to go out on a limb and predict that certain countries with abundant nuclear weapons are wargaming scenarios that will wipe out much of the human population, friends and rivals alike, before the victims can retaliate. (Maybe countries with nuclear reactors will be spared- somebody must survive to decommission these plants.) I understand neutron bombs leave no fallout so there would be no blowback. Fewer people to consume what’s left, and the carbon problem takes care of itself. The US is the most likely, but i wouldn’t rule out Israel.

“I understand neutron bombs leave no fallout so there would be no blowback.”

I don’t think it works this way.

First off, so-called “neutron bombs” are still atomic bombs, albeit optimized to produce more fast neutrons and fewer “thermal” neutrons. They appear to still produce about half the explosive force, while enhancing neutron radiation by perhaps a factor of ten. There’s still a lot of destruction and fallout.

The down side of this is that irradiation by neutrons causes that which is irradiated to itself become radioactive. This means those cities that have been “cleansed” of people via neutron bombs will remain as uninhabitable as if they had been reduced to rubble — perhaps more so.

“if it the notion that we have way outgrown our petrie dish once oil is out of the picture has occurred to the goodhearted likes of yourself and the commentors here, it has occurred to machiavellian elites as well.”

NewYorker, I came to this blog thinking the same thing (more or less). If we assign some sort of rational thought and planning capability to the financial elite that RULE this world, then we would have to assume that logically, they see the reality of approaching doom and have a plan to deal with it. But there is also a very strong argument to made that the “financial elite” are so detached from reality and so invested in the economic structure that they siphon all their power and wealth from, that they are incapable of seeing what is coming — they tend instead to believe in technology or free market rescues — or, more likely, they believe that once all the riff-raff have died off, they’ll still be standing and with about 6.5 billion fewer people there will be plenty of oil/gas to go around for a long long time.

I wouldn’t think they would need a neutron or any other kind of bomb. Just stop the oil deliveries — the starvation, riots, and mass chaos will to as much or more damage than the bombs, without the radiation.

I don’t think the 0.01% – the super consumers, don’t even connect to any other kind of reality. Seriously would you buy shares in a company that experts ‘valued’ at $25 billion for $50 billion- that became a $25 billion company 6 months later and doesn’t actually make any money- or things- or own any real physical assets?

Or buy twitter shares, or believe oil companies that say they have rights to billions of barrels of oil just waiting to make them rich?

I play poker for fun and any spare money I can afford to LOSE- I win quite a lot mainly because the gambling addicts think they know the system, are optimists, over confidant, but are very unaware of the rest of the world.

do the 0.01% have some super plan? No. They are working out the next best deal- the next strategy and reading IEA reports on future discoveries of oil.

Well, the four horsemen have all sorts of unintended consequences such as blowback on the first world and its unpleasant sequelae. Better the unnexpected first strike to remove competitors for natural resources, irradiated as that lost world would be. The remaining 10% ,probably less than that ultimately once the ‘takers’ are sterilized ( it will be that brutal a world) , would organize to make a world less luxurious but sustainable for the long haul.

I am not convinced that the military are thinking in such terms, although I suppose such thinking is possible.

I expect as a practical that there are not very many of these bombs around. The Wikipedia article says,

The pulse of neutron radiation would cause immediate and permanent incapacitation to unprotected humans out to 900 meters,[5] with death occurring in one or two days. The lethal dose would extend out past 1400 meters, where approximately half of those exposed would die of radiation sickness after several weeks.

900 meters and 1400 meters are not very big distances. It would take an awfully lot of these bombs to make any material difference to world population. They might take out a military base, but not a large city.

I would not be surprised if TPTB would spread some nasty militarized microbe over the big shitties to wipe out all those superfluous people & let any survivors bury the dead.

There aren’t too many other options when you have 7 + billion humans who will not survive the end of affordable oil, they must go & they won’t go without a fight.

Because of all the damage we have done to our environment, we will not be able to even sustain the several million that once were sustainable in this country before oil.
I see no easy way out of our predicament other than mass deaths & any road to sustainability will be very rough.
If the rich expect to weather the storm in their gated communities, they won’t,They will be over run by the desperate masses even if they have to climb over the bodies of their friends to get to the goods the rich are hording.
Fleeing to the country won’t help either because more people will not be welcomed there.
There is no place left to hide in, prepare for the worse.

They can’t be as dumb & clueless as most amerikkkans are, Surly they know the end is near & are preparing for it. Why else are they hording so much wealth? I don’t think it will do them much good however, the people who have prepared to be independent have a better chance as long as they aren’t too close to some big shitty.
It’s clear to me that humans won’t go extinct simply because there are too many of us in too many varied environments. The more dependent you are upon modern conveniences, the more venerable you are.
What I fear the most is how the governments will handle this problem of too many people & declining resources. To them we are just cannon fodder for their resource wars or faceless “consumers”.

The super-rich horde wealth because….they just can’t stop. Remember, for the successful it’s an absorbing game. A game…

Those with children are now aggressively acquiring farmland, forestry and real estate, etc, which they think will survive the hyper-inflation which they believe is inevitable fairly soon. Some are stocking food, too, of course. The more pessimistic ones that is.

Also, they generally only think in the very short-term: as one said to me recently – ‘I’m getting 10% on that last real estate aquisition so I’m feeling pretty pleased about it and looking for more. ‘ This particular individual does not like to think too far ahead, and is fairly typical I have found.

Dear Ms Tverberg, your analysis is quite convincing, although one could argue that the oil price movements are epiphenomena of “regular” financial bubble dynamics, where all commodity prices decrease through deflation.

In my view your hypothesis is supported by taking into account copper prices, which are widely viewed as an indicator of economic actvity. Oil prices were increasing quite some time before copper prices in 2007-2008, and much faster too. In fact the copper/oil price ratio chart does illustrate quite nicely your view that oil problems are driving the present economic crisis.

Some consumers can afford more than other consumers. So as the cost to produce goes up an ever increasing fraction of the population slides from self supporting to government aided. What will the US look like when we get to 80% on government aid of one sort or another. Will oil producers still accept treasury bills for oil?

The government will stop functioning before the US goes to 80% on government aid of one sort or another. In fact, it is hard to see that the current percentage on government aid can really work for very long. We really need a big subsidy from cheap fossil fuels to subsidize it.

The Social Security system is funded assuming that those working are paying for those who don’t (with a bit of pre funding, that is quickly spent and replaced with government debt that is not included in Figure 7, because it is not publicly held). When we get to 80% working, the remaining 20% must support them. In fact, the percentage of wage-earners will likely be even lower than 20%, because some workers will have spouses and children that are not working.

Of course, this doesn’t reflect all of the other government expenditures either–buying jets, providing foreign aid, guaranteeing loans and pensions. The debt problem becomes so bad that there is no way possible to pass a budget, or the population revolts from high taxes.

I read it, and I re-read it, and I still don’t understand how oil prices can fall over the long term, unless the economy somehow becomes fully de-coupled from fossil sunlight.

Unless, of course, there is massive de-population, scarcity in any essential substance can only result in increased price pressure, no? I can understand that it may whip-saw back and forth, but the trendline can only be up — as long as there is a consumer base that is decreasing more slowly than the supply.

Is the hidden subtext in this article that population is going to necessarily begin decreasing, causing massive deflationary pressure? (In other words, more “stuff” per person becomes available.)

More stuff per person is only theoretically available
Our sophisticated economy sustains itself by virtue of its sheer numbers. Taking an extreme case to a ridiculous example, If there were only 1000 people with most of the wealth, and a few million paupers, our society would still collapse further because all the ‘stuff’ we use to create our wealth delusion is created by billions of workers. It wouldn’t function with just a few workers.
There wouldnt be enough of us to sustain our ‘oil system’ for instance. Oil would still be in the ground, but useless without the means to extract it
This is why we cant downsize, our working system would collapse if it fell much below what we have already. Our economy is interdependent with all its component parts.

sorry Gail, that’s your job. Women are always better at multi tasking,
The only multi tasking men can do is lift their feet up and read a newspaper simultaneously while the lady of the house is vacuuming the carpet.
That is proven science

‘Stage 2 Response’ is my ever-growing cache of the home-made Basque Wonder Brew: Xabier’s Patxaran. Recommended since the 14th century as the Elixir of Life and cure for all bodily and mental evils…..

Made with sloes (great, heavy crops this year!) and anis, (plus non-medieval vanilla and coffee beans) it takes at least 6 months to mature. My version is so potent that if Banking Collapse does happen in late 2014/15, I’ll have more than a few stiffening drinks on hand, and indeed may not notice it at all…….

In the meantime, the sight of the 2-litre Kilner jars full of ruby liquid is very heartening.

Also planting almond, hazel and apple trees as a gesture of faith in the future.

Hello Xabier, I am sure you have a trad-able item there with the Beer. We will all need something to help ease the pain if it hits. I still do not think it will hit that soon as I am always amazed long things that are dysfunctional can operate. Lately I have been thinking we have perhaps 10-30 years before it really gets tough. The stock market and bonds can collapse and it will hurt but life will go on. And, I do not believe oil will get cheaper as it gets scarcer, we will be paying perhaps $10 for gas but once again life will go on and we will be driving smaller cars scooters etc. along with more cheaper electric cars that will arrive then, so I do not see the collapse coming that soon, As for me a am a red wine lover and would like to have some stocked away just in case I am wrong. $10 gas would mean a more simple life which is what we should be doing to conserve resources. Perhaps then only the rich people will fly on planes.

Send us an update on Spain when you have time, I know you do not live there but have family there.

No. The problem has nothing to do with population loss. It has to do with diminishing returns bringing down wages (as oil costs rise), making fewer jobs available.

The problem is that common workers are becoming poorer and poorer (because of diminishing returns), so the government needs to subsidize more of their costs. The government eventually finds it impossible to collect enough taxes from those who are still working to pay the costs of those who are not working. This is exactly what happened in the collapses that Turchin and Nefedov examined in Secular Cycles. Joseph Tainter, in The Collapse of Complex Societies, also came to the conclusion that it was diminishing returns that brought down the societies he looked at (including some of the same ones in Secular Cycles).

The role of diminishing returns is obvious in the case of adding farmers to the same plot of land. It is clear that you cannot add very many workers because very quickly, the new workers just get in the way of the existing workers. It doesn’t make any sense to pay the new workers very much, if that don’t add any real value.

It is not as obvious why salaries would go down when oil prices rise, but if you think about the situation you can see what happens. Suppose the young people today all had good jobs, and were driving cars, and buying homes, as they did years ago. The total amount of oil required to operate such an economy would be far higher than what we can in fact pull out of the ground today. Diminishing returns solves our problem of limited oil supply by giving us fewer jobs, and generally lower-paying ones. Thus, there is less demand for new cars and new homes, keeping demand in line with the limited oil supply really available. Sort of like magic, but that is the way systems work together.

I still don’t understand how oil prices can fall over the long term
It’s an excessively complicated market mechanism that takes pages to explain and cannot usually be grasped by those who did not witness the phenomenon first hand but only observed it happening to others, far away.
In layman terms, the process is called not being able to afford, or not having money to buy.

Let me take a crack. Hard (expensive) to extract oil leads to fewer jobs that are profitable. Leads to few jobs. That is the jobs that are no longer profitable stop existing. Smaller demand less need for extreme oil leads to some moderation in price for oil. I do not think it leads to cheap oil.

Interesting article – reminds me of the POD (Peak Oil Demand) idea of Rockman. The increasing price of oil will reduce the demand for it until a point is reached where it may be possible to increase the global flow-rate (production) but no one likes (or can) to pay for it anymore.

At the same time trumpets announce “The largest new oil fields in the North Sea” (http://www.enquest.com/media-centre/press-releases/2013/15-11-13-kraken.aspx) with a total of 140 million barrel! That’s not even 2 days global demand – and they require approx. 4,5€ to develop it. Thats approx 44$/Barrel only for developing the field – not including the cost of pumping the stuff out – over a period of 25 years! So the cost of silly North Sea Oil may be 80$/Barrel for the producer alone!

To make all even more strange, even the IEA say that the miss the 2°C climate goal and get 3,6°C when we consume the fossil stuff (Oil, Coal, Gas) as forecast by the IEA until 2035. Guy Mc Pherson anyone?

But thats not all – the ever optimistic IEA says we have to spend approx. 660 Billion $ (in 2012 Dollars) a year until 2035 to keep the oil and gas flowing. So please no financial, economic or other crisis the next 22 years, please! If we do not do that, the current 75 MB/d would decrease to approx. 14 MB/d due to decline rates.

So, in addition to Gail I do see a myriad of problems! If we get the stuff out – which we may technically can – then the climate goes bust. Currently I see it not realistically that we can actually increase the production in 2035 do that for 128$/Barrel (in 2012 Dollars) when new Shale plays are reaching 80-100$/Barrel now. In addition it is my opinion, that it is preposterous that we do not have a major financial crisis within the next 22 years that may be disastrous for the forward financing of new oil-plays and the require infrastructure.

We may actually have a multitude of interrelated crisis, that destroy demand, let prices fall, cap exploration and produce later on exploding prices that cap demand and growth, cause crisis, cap demand….. you get the picture.

IEA has a job of making it look like we can expect business as usual. They have known about oil supply problems for a long time, and even included peak oil estimates in one report (I would need to look up the date.) But they would scare everyone if they told the real story. They really don’t understand how low prices might keep the oil in the ground, either. It is not an easy story to tell or understand.

The IEA has focused on the climate change problems for years. In a way, it comes across as an excuse to tell the population to “do something,” without really explaining what the real problem is. If we hit collapse, I expect that production of all three fossil fuels will collapse simultaneously. We will also pretty much stop using our expensive renewables at the same time–except perhaps a few that are not grid connected. Those devices may last until they fail, or the device they are connected to fails.

Perhaps climate change will hit, but the scenarios modeled won’t be right, partly because of the much reduced fossil fuel use. There also will be many fewer of us to worry about climate change.

Still, I find the IEA report – and also the latest Shell study always very interesting. It is the stuff between the lines and the changes between reports that is important to look at.

I understand that the IEA, as official part of the OECD, is limited in what they can say publicly. If they or others would – tomorrow would be the begin of the collapse. So their stuff is more like the best that can happen.

And correct – if collapse comes we fast a drastic fall in the consumption of all fossils. But I see, that we will burn through all available wood very fast short after the collapse of fossils and their distribution network.

Sort of disagree. The people with the biggest fuel needs will be those in the cities, where there is very little access to wood. And they wont have the fuels they need to collect from the forests which are both far away and sparsely populated. Those who live among trees will have plenty of fuel for a while, although I am planning to reduce the height of all my trees in the next couple of years – nothing over about 3-4 metres because of the increasingly fierce winds they will need to withstand.

Hi Gail, Thanks for another good post. Those charts were interesting, housing does not yet look like another bubble yet.

I would argue that the price of oil and gas will rise in the future due to scarcity, it may first go down but when production shortages lead to real shortages, the price will increase. So I see a more inflationary future for us in our costs of oil and things you buy every day.

Not to mention all of the QE and new money currently hiding in places like stock and bonds, if these markets collapse and loose value that could be deflationary a way of destroying some of the newly printed dollars but as oil and gas get more finite and expensive to dig out of the ground one would think that supply and demand equations would lead to higher prices and hence inflation at some point. But I do agree we could have a brief period of deflation first.

Demographics and the collapse in household formation (Millennials coming of age are financially incapable of driving a suburban housing growth cycle) implies that further growth of housing and real final sales per capita is unlikely hereafter. An incipient recession might already be underway as a result of the yoy contraction in the peak demographic cohort age 25-54.

A consumer economy does not grow when the labor force and employment for age 25-54 is contracting yoy, needless to say.

Those who are bullish on the US housing market, and generally the auto- and oil-based suburban mass-consumer economic model, are likely to be Boomers who are projecting their own life experience while coming of age in their 20s on Millennials and extrapolating forward, assuming that Millennials have the same opportunities, employment conditions, after-tax purchasing power, expectations, and values as Boomers. However, it is demonstrably clear from the growing evidence that Millennials are wholly incapable of replicating the post-WW II growth regime.

Specifically, ~36% of Millennials remain at home with parents. Only 43% have full-time jobs. Millennials’ labor force participation rate is 10% below that of those over age 34. 10-15% are unemployed. 50% of college grads (30% of the cohort) are unemployed or underemployed.

Aggregating the aforementioned factors, including persons per household and immigration as a share of population and households, and one arrives at an estimate of new household formations of no more than 170,000 (0.14% growth) for Millennials (fewer during recessions) vs. the historical average of 1.3 million during the post-WW II period through 2007 (624,000 since 2007).

However, accounting for Boomers leaving the full-time labor force, the implication is that US labor force and household formations could actually contract in the years ahead (as is currently happening), particularly during cyclical contractions and the persistence of no growth of real GDP per capita, as has been the case since 2007-08.

Putting all of this together, the US economy is much weaker and subject to significant risk of an annualized q-q contraction for real final sales and GDP per capita than any economist or financial media pundit realizes or is paid to say (or not say).

But none of this should be surprising, as the US, EU, and soon China are following Japan’s demographic drag effects, exacerbated this time around by global population overshoot, Peak Oil, increasing costs of complexity, energy density, and sustaining a mature modern infrastructure, and the cumulative global effects of Limits to Growth.

Most establishment economists are so far beyond this emerging curve and its implied effects as to be utterly irrelevant, if not worse.

And now the alleged best and brightest of the economic intelligentsia are coming around to the obvious that real GDP per capita growth is no longer possible via neo-Keynesian deficit spending at unprecedented levels of public and private debt to GDP; therefore, the policy of last resort hereafter is central banks (TBTE banks) encouraging, enabling, and defending MASSIVE asset and credit bubbles to GDP and wages in a vain, misguided attempt to produce a dubious “wealth effect” for which there is no empirical support. Asset prices follow growth in private investment and the “wage effect”.

In fact, credit and asset bubbles (ALWAYS driven by excessive bank lending or leveraging of existing financial assets) result in GROSS mispricing of risk assets, misallocation of savings, and hoarding of overvalued assets by the top 0.01-0.1% to 1% at no velocity, reducing thereafter growth of real GDP per capita.

Finally, credit/debt and asset bubbles are by definition the consequence of increasing wealth and income concentration to the rentier/non-productive caste from rent seeking of 7-10% returns from financial assets at the expense of productive investment and returns to labor of ~3%. Asset bubbles are a guarantee of onerous, unserviceable rentier claims against wages, production, profits, and gov’t receipts in perpetuity, ensuring no growth of real GDP per capita indefinitely until the onerous debt service claims are cleared as a share of wages and GDP.

The more I think about it, the housing bubble in the early 2000s was very likely what hid the 2003-2005 run-up in oil prices. We have been going from bubble to bubble, trying to avoid a complete crash. Meanwhile, economists don’t think of oil prices as having anything at all to do with the mess we are in today. Globalization didn’t help either–we cannot compete head to head with much lower wage countries, with few pollution controls–something economists didn’t figure out either.

Anyone with just half a brain would realize that globalization would only benefit a few, rich people. I was opposed to NAFTA, SHAFTA, CAFTA, WTO & now TPP from the beginning, I knew what would happen, that our manufactures could not compete against slave workers & the result would be our jobs would go to the cheapest labor & dirtiest manufactures.
It seems that the politicians that approved those agreements were blind to the inevitable end result, more unemployment, lower wages, fewer taxes paid and more $ needed for social services.

Those bribed politicians may be better off now but the country is going down the toilet.

What will happen when all those troops finally come home? No jobs, cut benefits, more poverty & the realization that their service only benefited the military industrial complex & had nothing to do with defending us or our former freedoms.
They will be pissed! You don’t want millions of former service people who know how to kill & are armed, pissed off at their corrupt government.

Hello, Thanks for those charts, I was talking about housing today as compared to about 2007-2008 prices. This is is a house in CA I have followed and then a house was worth about $900K in about 2007-2008 would be worth about $350K today, but it went as low as 225K at the bottom after the 2008 blow out. So my point is that housing may be re-inflated thanks to the Fed and Central Bankers today but not as much as it was before the 2008 collapse.

for the last 5 or more years the global economy has coped with oil at 3x times the historic price and globally increased coal and gas prices. The global economy has also coped with stagnate oil supply- with OECD countries economising on consumption. Coping is a matter of perceptive, of course and could be simply stalling.

there are some odd behaviour patterns- in spending eating out in the UK has increased and recovered to pre 2008, it appear with limited funds certain activities are preserved as luxuries. The very low interest rates are also driving house prices particularly around london up [and land prices across the entire country] The amount of money in the economy in 2008 for the UK compared to today is down in real terms a few %, and up a few % in the US without much population growth.

People are taking out less debt to buy imported Chinese made electronic goods- as an instance, as well as reducing oil /energy consumption through energy efficiency and reducing pointless expense.

So is this stagnant growth- or slight decline a holding pattern that could last decades. After all the OECD countries grew a few % each year- increasing consumption and GDP – therefore if we are forced to buy a little less and upgrade items less we could eventually end up at 1990s levels of wealth – which by any standards was pretty wealthy. A slow motion collapse taking decades.

The more immediate issue though is capitalism and the markets- the availability of cheap loans encouraged workers to get mortgages which was taken to extremes prior to the crash. Workers paying mortgages don’t tend to go on strike and are prepared to work harder for less.

globalisation broke the power of working populations in rich countries through out sourcing- however the loss of well paid jobs meant less money to buy consumer goods that in turn required more cheap loans and personal debt.

Socialist countries in Europe have adopted the US debt model for education leaving 20 year olds having £30k debts for fees and living costs. A growth industry in the UK is quick loan companies that offer interest rates at 1700%

The bail out of the banks and the fact they now lend 10 times as much money as they borrow [or what ever accounting trick they use] is funding shale oil and gas, as well as dotcom businesses like twitter, facebook. And it is in the interest of almost everyone to believe these investments will pay big returns- including ordinary workers whose pensions depend on imaginary wealth. BP is a major donor to UK pension funds, it is in no-ones interest to presume that their operations will not yield the returns either because of tricky geology, diminishing field discoveries and CO2 regulation.

Yet the market is not going to stop trying to make the next buck. I understand the Bank of England is already setting aside funds for the next bail out. Property markets in reduced number of areas [compared to pre 2007] are overheating again. And the Euro [and US debt] are both being kicked down the road with both potentially offering market opportunities in currency speculation.

So is it more likely capitalism will collapse before the real economy [I don’t mean Western freedom but the market of debt and speculation]? The collapse of US shale oil companies would be my first uneducated bet with mass bankruptcies and more importantly destruction in the belief of endless oil. Of course there are plenty of other commodities that I am sure are being speculated on. And capitalism has a habit of reinventing itself after every failure or regulation.

Sorry for such a long post but such stimulating post tend to stir more questions than can ever be answered.

China relaxing the one child policy will most likely not have a big effect- they have an ageing population, far too many men for available women, aspiring consumers and a need to develop a home consumer market as well as a few more future wives.

Yes, it is hard to know what to make of the current goings-on. People seem to be getting along OK, and as long as the governments can continue selling more of their debt, and don’t run into problems with getting their big deficit budgets approved, there seems to be a chance that the can can be kicked down the road a while longer.

But anything that can’t go on forever, won’t. It is just difficult to know precisely how the situation will come to an end.

You are right. What I am showing is really very closely related to your Triangle of Doom. Thanks for pointing that out. I suppose it was lurking in my subconscious along with other things.

Do you get as much negative reaction to the idea as I am getting–or perhaps just lack of understanding? There are some absurd number of people giving the post one-star ratings (or perhaps the same person, with a some sort of program allowing multiple ratings).

As a regular reader of your weblog, I too immediately noticed the unusual mismatch between the number and value of *-votes, and the generally positive discussions.
Is the “incumbency” (in Jeremy Leggett’s meaning) hiring straw men to vote this posting down?

As Leggett describes aptly in his newest book, thing are getting more unhinged by the week…

First of all, I think you are doing a wonderful job. One of the hardest things to do in the USA in 2013 is to simply tell the truth. There is endless push-back, it wears on a person, it requires a certain kind of personality to persist.

Is TOD/diminished available resources unpopular? It certainly is, the idea is hard to explain to folks who have no interest in grasping it.

from ltg the 30 year update page234
“once the population andeconomy have overshot the physical limits of the earth, there are only two ways back: involuntary collapse caused by escalating shotages and crisis, or controlled reduction of the ecological footprint by deliberate social choice”

“ecological footprint” = total number of humans x average consumption / person

therefore we must stabilize or reduce population and reduce average consumption

Let’s not complicate things too much. There is no secret cabal of elites planning this or that or the other. And I frankly consider myself a conspiracy theorist, and have huge doubts about the official narrative of 9/11.

The money supply is controlled by central banks. Because we use unbacked fiat currencies worldwide, money is infinite and elastic. It’s just a question of who gets what, and when. The central banks did what they could in 2008 and began to liquify the banking system and transfer toxic debt onto their balance sheets. Was it the correct move? Probably not, but back then people believed we didn’t have any time.

Ok, so when the next crisis hits, what do you think the response will be? It will be more liquidity…more currency. That will be the only thing that can prevent a general deflation. But going back to the question of who gets what, and when. You see next time around there’s not as much space on the balance sheets. So the central banks won’t be able to bailout the entire system.

Expect bankruptcies in major banks, and major industries including energy production, auto, airline, tourism, healthcare, etc. This will be another step down, and a major one, in the “catabolic collapse” model. Once this happens, the oil price will once again try to stabilize at a goldilocks level which is just enough for the remaining producers, and just low enough for people to consume what they need for basic living.

But quite frankly I think it will be a healthy correction. We’ll buy ourselves more time. Ultimately, industrial civilization is doomed, but the end to boom and bust will, in the short run, place things on a somewhat more stable path.

But don’t you think that if the step down goes to a new lower level, it will only last there a few years? It seems like all of the forces are still in motion to try to push the system down further.

Also, it is not clear that the economy can really function at a step down. Major parts of the system, such as international trade and international finance, may need to be started all over again on a new basis. Also, we will likely need to get along without computers and other high tech equipment.

Right now, oil demand from China, India, etc. is keeping the price up (certainly not demand from Greece, Portugal or Detroit). Their hunger for oil is immense, their middle class still small, their economies becoming less dependent on exports. Someone said half jokingly: “Chinese coal and cheap labor is exchanged for Saudi oil, German cars, French wines and Dutch paintings”. It’s all global, so our view tends to be too narrow. There can never be a low price of oil in one region only, as happens with natural gas. Emerging markets might be willing to bid the price of oil up again and again. Maybe there are 1 billion young people right now, waiting for their purchasing power to increase just a little bit more, in order to buy that first burger, phone, computer, vacation, car. Or – for that price to come down just that little bit. That’s where global corporations play their game, and it’s not just silly old BAU-thinking that makes them continue.

It looks like TPTN are setting up the narrative for us already. See http://www.bloomberg.com/news/2013-11-12/brazil-to-boost-oil-exports-as-output-triples-iea-says.html
Some quotes:
“Brazil will triple oil production by 2035 and become a major exporter as it develops the Americas’ largest discoveries in almost four decades, the International Energy Agency said.”
“The new production will come mostly from deposits trapped under a layer of salt more than two miles beneath the Atlantic Ocean’s floor, the so-called pre-salt fields.”
” “The increase in oil and gas production is dependent on highly complex and capital-intensive deepwater developments, requiring levels of upstream development beyond those of either the Middle East or Russia,” the IEA said.”
” “[Tapping these resources] requires substantial and timely investment throughout the energy system,” the IEA said, estimating the amount at $90 billion a year on average.
The above quote actually starts with “meeting this demand” which I replaced because it us entirely misleading.

So, in other words, if the expensive oil off of Brazil is never developed it will have been because we failed to provide “substantial and timely investment”, not because the oil is so expensive to get out. The narrative will never be “we ran out of cheap oil”, it will be something like “We failed to invest enough money in oil production.” Regulations and politics will be blamed, never our outrageous demand for finite external and cheap energy (and other resources).

I agree. It is likely that most of the population will never understand the real dynamics behind what is happening now. It will look like bad regulation, or misguided policies, or not investing enough funds–it will never look like exhausting cheap finite resources–which are all we can afford.

Maybe there is a way out of this trap, by the creation of new money by the central banks at zero interest and investing this money directly in the oil and gas business. If it is not profitable, nobody really cares. The money that was created, is just used to pay the engineers and contractors and manufacturers of equipment, who can then buy more expensive homes, which fixates the capital in a sort of virtual wealth (a house is an assembly of construction materials and working hours originally intended to provide shelter, but its market value is mostly imaginary), and so preventing hyper-inflation. Rich people do not buy a thousand breads every day, nor do they eat a tonne of meat. Worst case, their swimming pools are too hot, airco’s too cold, or they travel too much with big cars or private airplanes. That can be forbidden or a quota-system can be imposed if necessary.

Money is the core issue. Our debt based money system that must expand by design can not cope with what is before us. If is effective in the way of expansion, extraction and growth + all the dirty tricks that are helpful to reach those ‘goals’.

Now we need collaboration on long-term societal goals – and I haven’t a clue of how to transition the system on the down-slope. The prospect of a stable ‘less’ is hard to sell if 99% do not understand the problem and loot for optimization of their individual prospects. It is even hard for me.

A huge amount of money is being invested into shale operations, because money is being lent out at close to 0% interest. The operators are putting together very optimistic balance sheets, and earnings reports assume that front-end costs can be amortized over a very long period, using money that has been borrowed with these low interest rates. (Or would-be investors borrow money, and invest it in stock of these companies.)

The steep difference in wages acts precisely the way you describe. The rich spend more than the poor, but far from proportionately more. So by increasing wage disparity, Nature cuts down resource use. This is really sad, but it seems like the way things really work out.

I’m assuming this comment was made tongue in cheek, I hope so anyway.
But just in case it isn’t, then it sums up our collective problem very neatly, in it’s assertion about ‘creating money’. The vast majority of people are convinced that bits of coloured paper and plastic have an actual value, and all we have to do is print the stuff to get wealthy.
very few people accept that money, in the sense of it having value, cannot be created.
Our present day money system was created by the ever-increasing volumes of oil coal and gas extracted from the ground to drive our economic infrastructure. Hydrocarbon fuels became our collateral for future debt, There was always more hydrocarbon, so we could always have more debt. Easy, and supposedly infinite
Now people are convinced that we can do the same thing in reverse, by stuffing money into oilwells, convinced that it will deliver even more ‘wealth’.
As to the simile of a ‘house’ being used as a reference point. The reason a house has had a rising value, is because it represents a package of embodied energy. (just as a car is embodied energy) As long as energy prices rise, and more oil becomes available then people can take on more debt to buy more energy-embodied products. The actual product is irrelevant. We have all been chasing energy intensive goods by borrowing money, and using energy itself as collateral.
You can use energy to print money, you cannot use money to print energy

End of More, thank you for your considerations.
It was not really tongue-in-cheek, but from your reply, I understand that it is not clear what I meant. If the hard-to-extract-oil becomes too expensive for our economy, it will be game over. A system collapse. A crash. Then the price of oil does not matter anymore. There will probably be a lot of battles for the remaining but slowly flowing easy reserves. No longer 80-100 Mb/d, but some 100kb/d for centuries. A stable situation, but not as glamourous as the situation a lot of the middle-class are living now in.
That transition cannot be made in a couple of months. But it has to be made, or it will make itself.
So, in order to make that transition, we will need some of the hard-to-extract oil, to give the economy enough time to adapt and to shrink. But, the economy must not “shrink”, so there has to be a trick to add some virtual, or non-material economy without needing much energy. Let’s say a virtual world, that can be powered with solar panels.
But this world has to be built, and old habits like physical traveling, commuting, have to diminish.
So, some kinds of Quantitative Easing, and some bankruptcy now and then, will be necessary, not to create growth with more energy and more consumption, but to do the non-profitable things that must be done to make the transition (and without people noticing it, for which purpose some puppet-theatre is organised).
Some banks are putting a lot of money into fossil energy these days. I don’t believe this money all comes from our savings. That money might be lost. So it is not putting money into the ground, but some kind of creative use (cheating) of the money as debt/value system to keep the drillers and equipment manufactures motivated for the time needed.
I remain confident in the people who really organise the world.

There are definite minimums that are required for oil production. We need to train engineers for example, and run refineries. These have a minimum scale of operation. We use pipelines to transport oil. These have minimum operating requirements for pumping oil, and also require electricity for pumping. I don’t think it is possible to pump 100,000 barrels a day, unless perhaps one self sustaining country manages to do this, and also operates its own small refinery. It would probably need to be oil that doesn’t need much refining–not the heavy stuff we are extracting in many places.

Gail, thank you for this feedback.
The usage of the remaining “black stuff” might indeed be very different. I cannot imagine the unefficient usage that we know nowadays as the heating of a bad isolated house, or driving a car that uses only 10 to 20% of the energy of the fuel.

If I understand correctly, you say that national governments would subsidize oil production. I think this is an ineresting idea, too easily dismissed in the “everything will crash” line of thinking.
Why should they do it? It can only be
a) for direct use in their domestic economy (or allied countries)
b) for export in exchange for goods and services they don’t have in their own place.

In the US/Canada, this really makes a lot of sense: a good amount of oil in the ground, high domestic demand, and a big enough economy that can handle the oil production infrastructure on it’s own in the long run (maintain refineries, educate engineers etc.). And I don’t think the dollar would crash because of oil production subsidies.
China and Russia could do it.
Europe is a basket case – no domestic oil industry, no resources, too many people (except Norway).
For smaller oil countries like Venezuela and Nigeria, it would be more difficult to get a payback on subsidizing oil, they lack scale and complexity to make it work. But I imagine they could find some regional trading partners who take their oil in exchange for other resources like food, so subsidizing oil production can make sense at least for a while.

Right now, the global price of oil is the only distribution mechanism, because it is still a buyer’s market. If a small private oil company can’t deliver at a low world price, the buyer doesn’t care, someone else will sell. But in a different world, oil would only leave producer countries in exchange for real goods and services.

I am not convinced that a government subsidizing oil really works–oil in fact traditionally has been what subsidizes governments everywhere. This happens partly through taxes, and partly through the services that cheap oil provides.

Perhaps if a country has huge coal resources, and can use those to subsidize oil resources, that would work. Ultimately, it is energy that makes society operate. We cannot fake having energy, no matter how much we would like to do so.

But you DO remember that most of global oil production is already completely nationalized? I think you are dismissing this point very quickly here. It is not THAT expensive to produce oil, you need very little manpower, the know-how and technology is there. Most oil countries will be fine, including North America, and they represent a big enough chunk of global commerce to continue trade amongst themselves. The military, police, elites and governments in all countries will be fine. This is not forever of course, but for the next few decades, and that’s what matters to me. The Saudis and Russians are special – they export most of their oil today, because it works fine for them, but they would have no problem to leave it in the ground for the future and just produce for themselves. Perhaps they would have to stop flying around in private boeing jets and deer hunts in Scotland, but well, they had their fun. And it is a myth that they “need” the oil revenues to keep their population in check. That’s just the way they do it today.

When you write things like “I’m not sure there will be any governments”, I wonder about what kind of timeframe you are thinking. 100 years? Today, even countries with the worst economies have strong governments. Most people would say that some of your statements are not very specific. I know, the big picture, but still…

There is a difference between oil that is cheap to extract and oil that is expensive to extract. Governments want to nationalize oil that is cheap to extract to get all of the profits from it. In fact, that is what has happened around the world. Other countries just put high taxes on oil output. Oil is a big source of revenue for the governments of most countries that produce it. This is where a lot of oil dollars go. This is also a reason why Saudi Arabia and Russia are not likely to leave their oil in the ground–the governments need their cut of the oil money, to keep the benefits flowing to their citizens.

When we move on from the cheap to extract oil to the expensive to extract oil, then there is much less margin for profit. In fact, huge front-end investment may be required, with the idea that a profit might be earned sometime in the future. This is the point we are reaching now. A nationalized company is not particularly at an advantage in that case. Mexico and Brazil are working on getting oil companies from elsewhere to help pay for the extraction of the oil for them–only it is not really clear how long this will work, because the new companies will likely not be able to do it at a profit either. Venezuela and Ecuador have gotten long-term loans from China that can be paid back in oil, to try to facilitate extraction. If China (or someone else) is rich enough to pay for they oil, they can make extraction possible (and take a disproportionate share of the oil for themselves). Having a government take over oil extraction doesn’t magically make the oil economic to extract and allow the country itself can benefit. If extraction is economic, the oil may still go to some other country that can afford the huge up-front investment cost, or the oil may be left in the ground, if extraction becomes too non-economic.

The kind of government a country can afford changes as energy availability declines because programs for education, healthcare, retirement benefits require a country with a lot of energy usage, and thus wealth. Historically, there have been a lot of governments by dictators or by kings and queens. As the amount of energy availability changes, we should not be surprised if governments start changing. Changes can be in the direction of simpler governments (kings, dictators, etc.) or in terms of governments covering smaller areas (like the Former Soviet Union). The fall of the government of the Former Soviet Union happened very quickly. Its fall seems to be at least partly related to the fall in oil price (because the Soviet Union was an oil exporter). We should not be too shocked if other government changes come in the years ahead.

I did not think about governments. More some kind of world energy bank, that receives its money directly from the sources of the different moneys, and that keeps the powers balanced. With more secrecy than nuclear weapons programmes. I wonder if this could be done.

(no more reply button) Gail, thanks for this long answer, good information, I will think about it. The part I’m not sure about – government doesn’t need any profit, if something is really important. Venezuela and Mexico could still cut many other types of spending if necessary; asking foreign oil companies for help might just be a first and easy step.

Kings and Queens didn’t have our technology. It is very easy to keep a population in check with some tanks and guns, the former Soviet Union you mention was a good example. And they still have a nice empire – maybe they were a bit overextended before.

On the other hand – who knows, perhaps we are past a certain tipping point of global democracy. The Arab Spring movement seemed forceful. Perhaps governments will really be weaker in a crisis. Time will tell.

I think you are making a mistake in measuring the current and future price of wages, oil and other commodities in dollars, and in assuming that the dollar is a good and stable denominator.

The dollar is a purely arbitrary government issued token which can be produced in great quantities at no cost. Fiat currencies have a long and illustrious history of long term debasement, overnight devaluation and bouts of terminal hyperinflation. There are no good examples of commodity and consumer price deflation under a pure fiat currency system (CPI was positive through much of the the lost decades of Japan, and the USD was tied to gold during the Great Depression). On the other hand, there are hundreds of examples of hyperinflation spanning thousands of years.

I cannot see how scarce necessities such as food and fuel can depreciate in value in the medium to long term against arbitrary government issued tokens. There are no good historical examples of this, and plentiful examples of hyperinflation coinciding with economic and societal collapse.

I think if you question your sentence: “The dollar is a purely arbitrary government issued token which can be produced in great quantities at no cost.” lots become clear.

Its exactly that the Government can’t produce money at will! If it could do that – it would have no debt, no Government shutdown, etc. Debt creates money – nothing else! Not in the US, not in Europe, not in Japan, etc.

In that ‘Money creation via debt’ play two parties are involved:
a) a (mostly) private bank and
b) a (private) person or entity (company, public sector at large)

The debtor b) has to have an asset as a security for the bank. That may be a house, a prospective future income, shares, etc. pp. – something that the lender a) can get hold of when the debtor can’t repay the loan. To make sure that that works you need laws and an enforcing entity (court’s, police, etc.).

Ones debt is the other ones riches, so the sum of all (monetary) debt is equal to the sum of all (monetary) riches. If someone goes bankrupt and can’t replay the load, some ‘riches’ have to be ‘nullified’.

Because no one with ‘riches’ has interest that his riches are going to be nullified – and even want more riches someone new has to go into debt or ‘guarantee’ for all those bad loans. Currently the states and the central banks (in US, UK, Europe, Japan) fill that hole… they have taken on the bad debt of banks and provide liquidity in exchange for bad securities (i.e. assets) as under-water housing loans, bonds and the like.

And as long everyone has to pay their debt and taxes back in $ or € – as long there is a market for those currencies. And as long it is harder and harder for the “90%” to obtain each single $ or a € – the value and the demand will keep up – as we move into a deflationary environment.

In addition using dollars or euros as a measurement is quite fine – if you fix it for example to 2012 dollars or euros. Since most is priced in that two currencies and there is an exchange rate – you have a well known measurement. If you look at all the charts – you will not find “a stable denominator” – there isn’t such thing.

I agree. All that we have is the goods and services that society produces at a given time. Money is a way of distributing these goods and services among the various people. It doesn’t by itself create any more goods and services.

The one exception is that to some extent, rising debt can be used to boosts demand (and thus the price and the supply) of commodities, because the growth of debt adds to the funds people earn from their jobs to buy the goods commodities are used to make. Unfortunately, with diminishing returns, at some point rising debt no longer works for this purpose, because the economy is shrinking not growing. Lenders won’t lend any more to people without jobs. The loss of debt cuts back on demand, and causes a huge problem–prices of commodities tend to fall rather than rise, leading to a cutback in supply.

There is nothing solved in the periphery – and even France gets more and more structural problems. Germany in contrast profits from their heavy leverage on the export sector – but this is a double edged sword, as someone has to make a trade deficit when Germany made an trade surplus. But now more and more in the other member states criticism the “German export model”.

In addition the unbalanced trade surplus is kind of a natural thing that was the desirable outcome of the SPD led “Agenda 2010″ which in consequence lowered/depressed the total income of German workers – so that all of the proceeds of the “export wonder” land in the coffers of the companies (and share holders – where ever they may sit in the world). For many it has become kind of that Wal***t modell – work full time and still get social benefits, so society subsidizes your employer.

In addition the “Schuldenbremse” (i.e. “debt brake”) is the big thing on the agenda of Mrs. Merkel, which she (or the current people in power) want to apply to the whole Eurozone. Basically all the member states shall reduce their expenditures while in or going even deeper into the depression. So while having structural problems the member states have to increase taxes and cut (social) spending – which even increases the crisis (as even the IMF got in their heads in case of Greece).

In acknowledgement of all the issues there are developments to do a overall “Haftungsunion” (general liability union) where everyone somehow guarantees for everyone. Concerning the state-debts thsi is basically already the case (ESFS, ESM), but now it shall even be extended to the Bank-Deposit insurance mechanisms and unemployment insurance/benefits. So the German workers – which mostly didn’t profit from the company gains of the last 10 years – shall now pay via taxes and added risk for the structural damage the export model and the “Agenda 2010″ has produced….

For me it’s a little bit of “Endgame” – everyone takes over the liability of everyone – because if something happens to someone – everyone goes down with everyone.

I suppose that what you describe is supposedly a way of keeping things going a bit longer. But of course, to get more demand, you need more credit, even if you can’t afford it. The way you describe the situation, everything goes down together at once.

I am looking at how much goods and services the economy can produce. In an era of diminishing returns, the amount of goods and services produced by each citizen falls, on average, partly because many citizens don’t have jobs.

If wages reflect the amount produced (in inflation adjusted terms), they fall, because citizens are on average producing fewer goods and services. Perhaps this is because many are producing zero.

It is true that food and energy products to cook the food and heat homes will tend to increase as a percentage of total spending. “Services” are likely to mostly disappear. Products that can’t be used any more, like cars, will have very little value, except as scrap metal.

In order for inflation to occur, the money the government prints needs to get back to the wages of workers. At least recently, that hasn’t been working. Putting it in banks, and lending some of it out to speculators, only produces asset bubbles.

Hi Ert,
The old Hyperinflation vs Deflation vs Inflation debate is fascinating.
I understand the seemingly powerful theoretical arguments for deflation, but you haven’t answered the question: “Are there any historical examples of sustained consumer price deflation under a pure fiat currency regime?”

The excellent article below explains that this is a theoretical unicorn that does not have any historical precedent.

What happens now has no precedent.
From a theoretical standpoint it will be deflation. From a practical standpoint it will not matter since there will be absolutely no money in circulation, so you might as well call it hyperinflation since money will not be used as a medium of exchange anymore.
I hardly understand the fascination with hyperinflation and deflation at this point in the game, since it should be absolutely obvious for both sides that it does not matter anymore.

I agree. I expect that what will happen is haircuts to amounts in bank accounts as well as job loss. I don’t know if you would define that as deflation. In fact, some governments may cease to exist all together. The guarantees they give to banks will be equally worthless. So we are really talking as much about a lack of money as anything else.

The problem is the timing – there is no sustained deflation – as nothing is for ever – there must not be sustained deflation – long enough deflation ‘may be’ enough on the individual level.

Debt has to be paid – and whatever the governments and central banks will decide – you have to be able to survive the phase of deflationary forces, keep your job or income, ‘survive’. Inflation, “the reset”, etc. may come later in whatever fashion.

Since we have the same stuff (QE, low central bank interest rates) in addition to diminishing returns due to increasing energy cost worldwide – we enter new territory. There is no real ‘compass’ or ‘guidance’ this time – at least I didn’t find a convincing up to now.

I don’t think we know that debt has to be paid. Governments will likely fall and banks fail.

The only real question will by is, “How will food which is grown and water which is available be divided up?” My guess is that it will go primarily to the workers who produced the food and water, leaving holders of bonds and other debt with virtually nothing.

“I don’t think we know that debt has to be paid. Governments will likely fall and banks fail. “

Oh – certainly you are 100% right here!

What I meant was, that up to that point that debt can’t be paid – debt has to be paid. And until it can’t government will tax their people higher and higher, people have to sell some of their stuff – so that they do not loose all at once, etc. pp.

Greece is a good example, as they are not really allowed to go bankrupt, since even their ‘haircut’ produced big problems for the banks in Cyprus. And even before that, the ECB took over a lot of the Greek bonds. Today, there are simply to much interconnections. So in addition to all the problem Greece has – their increased property, sales, energy and general taxes! They reduced health-care, entitlements and salaries. Unemployment support is only for 12 months – then zip, zero, nothing, no food stamps, absolute zero! They are a current prime example for deflationary collapse.

When we are at the point where government like the US, Japan, Germany, France, Spain, etc. are failing – we have a big problem. But until that point we still have time. Failing is only then, when the tax revenue of the governments can’t pay anymore for the pure interest of the bonds. And this is still far out! And even before that there is still the option that the central banks monetize directly the government bonds – its only law that has to change ;-)

I am afraid we may still have the rich and the powerful running the show, and taking more than their share of the produce. But they will need workers, so they can’t treat the workers too badly.

I just don’t think that all the folks who have stocks and bonds in their retirement accounts will be able to stand in line for food ahead of those actually producing the food. In that way you are ahead.

The answer to your question is…..nothing! I’m inclined to think of the great estates of Spain where the landowners stayed mostly in town, hired the workers when they needed them and left them to rot otherwise.

Likewise, a totalitarian state could behave in the same way, not just private landowners.

More cheerfully, in the Communist bloc small peasant landowners did stay under the radar of state control and keep their lands (and profits!)

On this theme, I recently discovered and excellent documentary on YouTube ‘Christina, a Medieval Life’ by Michael Wood the historian, which is very illuminating on landowner-peasant relations in medieval England, and on the role of peasant capitalism in trying to break free from control. About an hour, but well worth the time I would suggest.

I believe there has been a lot of serious malnutrition in rural areas of Argentina, after the currency collapse and despite the big food export sector. Very much like Ireland. As I said, the Spanish landlords lived it up in town while their workers half-starved, being hired only at harvest etc. In the Christina film, it shows how the medieval landlords levied taxes even as the peasants starved – no pity!

In some sense, I am backing general inflation out of what I am looking at. I am looking at average wages, in inflation adjusted terms, and oil prices in inflation adjusted terms. I made an image showing 1929 to 1943 data by itself. (The article you linked to talks only about inflation rates, and not about real growth in the economy or in wages, so it is really talking about something different.

In the figure above, the income amounts are Bureau of Economic Analysis numbers adjusted for inflation. The oil prices are “US average” adjusted for inflation by BP.

Based on this chart, the inflation adjusted drop in wages stopped in 1933. By this point, inflation adjusted wages were 27% below the 1929 level. 1933 was the bottom of the recession in inflation adjusted terms.

Wages started growing in 1934, increasing in inflation-adjusted terms. In fact, in 1934, they were already 12% higher, in inflation adjusted terms. (Wow!) By 1943, per-capita wages were 2.5 times the wages in 1933. (I can see why we went to war!)

With all this tremendous growth in wages following 1933, the article you linked to indicates that there was inflation. This is hardly surprising, if the economy was being pumped up in this amazing way. In fact, oil prices got back to the 1929 level, so its inflation was less than general inflation.

The situation we are facing is much more analogous to the period between 1929 and 1933, when there was a lot of debt defaulting, and wages were falling as well, than it is to the later period. During the 1929 to 1933 period, oil prices did drop–in fact, by more than wages. In 1931, oil prices were 42% below their level in 1929. By 1933, they had improved to only 30% below the 1929 level. Thus, they still dropped by slightly more than wages.

The experience during the Depression thus seems to be consistent with what I am expecting.

It does matter in anything short of a Mad Max scenario. An ardent deflationist will logically attempt to preserve their wealth in physical cash and Treasuries, in the expectation that the purely symbolic IOU’s of a bankrupt government will increase in purchasing power. This is precisely the worst possible thing you could do in a hyperinflationary environment.

Gail, a couple thoughts, just for the sake of experiment, not reality:

What if we dropped a lot of legacy things, progressively over time? What if we cancelled debts, all subsidies, all entitlements. Let’s say we emphasized full employment. Returning labor to farming. Emphasized non-GDP connected production: things like local economies of trade that don’t register in dollars, or national debits or credits.

Negative-interest rate plans in a deflationary monetary system is pretty much slow-motion debt-forgiveness. Negative interest rate basically means paying people to take money on loan. Bank says, “we’ll pay you $20 to take this loan for $100.” Or in other words, “here’s $100, but you only have to pay back $80. But you still have to pay back $80.” What they want you to do is take out a loan *at all* – so they have some asset (your debt) on the books as a basis of making other loans. And they want the money to keep circulating. They count your loan, and then loan it out eight times again, or 12 times. Now the whole thing is shrinking, pretty much in line with the step-wise contraction of oil production, but the money is still flowing around.

(this is effectively what was being done, IMO, after the financial crisis, when banks were paying people $100 just to open a bank account. The incentive for banks was partly PR, but in large part, keeping money in the bank so they can loan out eight times more, or whatever factor…)

But you still have to pay back the $100 they loaned you- well, really the $80… and so you go to work. But you have less energy resources available… Maybe you do more things that don’t involve the normal energy economy: grow and sell produce out of your yard , for example. That is, more manual labor. You begin to replace energy resources with manual labor.

The point being, negative interest rates are essentially debt-forgiveness in slow motion, that keeps money flowing while the economy de-industrializes and returns to manual labor.

there are many, many tricky things here: 1) social unrest as funding for entitlements dries up, 2) de-stabilization of the US military hegemony and the world political balance of power. A big part of the need to keep money flowing is so we can service other nations’ sovereign debt with us. We need a strong military to keep our resources flowing so we can do so. that, or maybe they’ll forgive us our debts if we decommission our military? 3) serious problems with meeting needs without using the energy resources.

edpell – it’s a good point but the loan is naturally limited by the ability to repay it. I’m thinking of money as an equivalent of energy resources. As those contract over time, assuming a relatively slow and steady contraction, making good on a debt is limited by the resources available. So it will still be a lot of work to pay back $80 of the $100 loaned. But it keeps money in circulation, and could match the money supply to the energy resources available, avoiding inflation/deflation scenarios. Maybe. :)

First there needs to be some sort of widespread consensus that our economic models are no longer serving us. Our debt junkie society needs to put its hands up and admit it has a problem. Sadly even the simple logic that continuous economic growth is not desirable, let alone possible, on a finite planet still seems to elude the vast majority. It’s almost as if people are hardwired to discount this truth.

The economics profession has certainly put a lot of time and effort into developing models that assume infinite growth and no diminishing returns. As long as all economic papers rely on previous ones, the practice assures that they all use the same wrong assumptions. I am glad that geography departments don’t assume the earth is flat. In some ways, I find the situation rather similar though. Our politicians rely on the economists with their goofy models. So we are off in the land of silly economic models. The situation is truly bizarre.

I am not sure how we would emphasize full employment, unless we issue everyone a shovel as their main tool, and have them walk to locations where they might pick up seeds. Somehow, we would need to take the land away from the current owners to do this. (Shovels of course are made with fossil fuels, too, though.)

Otherwise, the extent to which we can have full employment depends on the amount of energy available. If electricity and fossil fuels disappear, we lose the ability to make metals, and most of our ability to perform international trade. Perhaps eventually we could build some sailboats for this purpose, but until then, we would be stuck with what is locally available. If we don’t mind burning down our trees, we could recycle some of the metal we have now, and we could heat our homes. But unless population drops very quickly, burning wood would quickly deforest the land.

Your real question was about the “borrow $100, pay back $80″ scenario. You have to have a society that is functioning fairly well to make loans in the first place. Today’s governments could indeed make loans for $100, with the expectation of getting $80 back, but they have other citizens they can (in theory) tax to make up the difference. My expectation in today’s world is that doing this in today’s world would cause the value of a country’s currency to drop, which is perhaps what countries can do to sell more exports.

In a world where countries operate on a stand alone basis, if a person lends a particular person $100 of resources, and asks that only 80% of those resources be returned, I am not sure how it works. Fossil fuels are gone forever, if they are used, so that leaves a big hole in the accounting. If economic activity consists of turning resources into garbage, maybe it would be possible to turn resources into garbage a bit longer using this approach, but it certainly isn’t sustainable.

Gail, yes, more likely “full employment” will be the result of you-better-get-to-work-if you-want-to-eat.

The idea of the negative interest is basically to match the money supply to the resource supply so they both contract together at the same rate. There are other ways to do this too: loan defaults and debt nullifications such as the financial crash beginning in 2008 look like the most likely way of contracting the money supply to match the resource supply. This is the most likely because the system will keep trying to grow even though it can’t. Negative interest loans could be a way to do this more intentionally and systematically, less catastrophically. But the idea is to keep money flowing around in the economy so there is trade activity and to avoid inflation/deflation scenarios.

Besides, a moderately inflationary policy achieves much the same result: if one holds cash, it will be stripped of value if the Central Banks keep pumping money in. Making new money is like a tax on holding money. In the Keynesian model, you just give people money in order to encourage demand and thus stimulate production.

In the inflationary model, largely it depends on how the newly minted money is directed, intended and used. For example, the government says you have to use your new money for resource-development: jobs move to the energy extraction sector. And this is what oil and gas subsidies are basically. Or, you have to use the new money for solar or wind development, or for energy efficient homes, or subsidies for local farmers markets, or for growing food in your yard, or neighborhood gardens; or for buying cows, goats, chickens… or for building houses out of clay (which is done in many parts of the world still).

Big problem is none of this really overcomes the diminishing returns on oil extraction. One way or the other, that means sacrificing much of the material largesse Westerners have become accustomed to.

But I think chiefly, the various tools for matching money supply to resource supply, thus avoiding inflation/deflation, is about avoiding panic along the way down.

I am having a little trouble understanding how the government gets this newly minted money to people like workers. I can think of a few ways they can try, but they have disadvantages:

1. Drop the tax rate way down — raises income net of taxes, but also raises government debt levels.

2. Send a check out to each family — raises income net of taxes, but also raises government debt level.

3. Give loans for homes and cars to people who really can’t afford them. This pumps up home prices and spending for a while, but tends to collapse, as it did in 2006.

4. Print money via Quantitative Easing. This only pumps up stock market prices, land prices, home prices. It also encourages investment in very marginal types of investments, including some oil exploration. Eventually, these bubbles are likely to burst as well.

Japan has not had very good long term success with actually getting inflation to take hold, when none was forthcoming. I understand they have done a bit better recently, but their track record is not very long.

Hello again,
During the depression, I never saw a fat person, and when I look around these days, I never see a thin one. there were a lot of unhealthy people back then, but they didn’t last long when they got sick. Not many people lived past 55 and a lot of nursing mothers, infants and children under 5 died despite the fact that there was a pretty good hospital where I lived. It was really tough running a farm with no electricity or petrol. I know it was a lot better than living in tent town or being on the road and moving from town to town to get food handouts, but you had to be fit and healthy and highly skilled to get anything out of the soil.
I know that you are worried about excessive debt and the power of ‘banksters’ I remember during the depression, that a number of banks failed here in NSW. A lot of people I knew lost all their savings while those who had loans still had to pay them back, to these banks. At the same time, I remember ‘an expert’ came out from the bank of England and told us all that we were living beyond our means, and had to work harder to pay off Australia’s excessive debt. Even after 80 years, I still bristle when I remembered how I used to get up at 3am to milk cows at our family farm while our politicians and dignitaries were bowing and scraping to this cove who was being wined and dined and driven around all over town in a limosene.
Some things never change.

I think quite a bit of the “fat person” phenomenon now has to do with the highly processed food we eat now days. Part of it has to do with overly large portions in restaurants and even supermarkets. Part of it has to do with lack of exercise, partly due to the nature of today’s jobs and partly due to the nature of today’s transportation.

You touch on something else I have been ranting about for years when I hear people talk about all this “money printing” leading to hyperinflation.

1) There is no money printing, there is the creation of ever more debt, borrowed from an ever closer future. Debt is, in this phase, essentially negative money, each new $ extracts value from the economy rather than adding to it and

2) there is NO pathway for that “money” to get into circulation so i can’t be a casue of inflation. The money is borrowed into existence, ,loaned to banks at 0%, loaned back to the state at 3% and used to finance wars (zero multipliers and huge real costs) and the most basic of services that barely stop people from dying today, ie, literally consumed immediately at the lowest economic level.

As you keep warning, the only future is deflationary and its here now.

Those are good points. At one point, there was lots of coal and later oil available to be extracted cheaply, if demand could simply be ramped up. In those days, growth in debt was in a sense good–it led to greater fossil fuel extraction, and the ability of would-be purchasers to buy those goods.

Now we have gotten to the point where it is no longer economical to extract oil. Natural gas is also reaching its limits. Coal is probably OK for a while longer. The only fuel extraction that can be ramped up is coal, in a profitable way for producers. (It helps bring average EROI down!)

We really need oil in the mix, and but even with the rise in government debt, the countries that use a lot of oil not able to keep up the number of jobs, and thus the demand for oil. The use of debt to shift demand is no longer helpful.

People were “making metal” long before the industrial revolution. After the end of oil, we will still have people producing metal objects, their called “black smiths” & with a lot of already made metal available, they will recycle most of that metal into other tools & products people will need. Some metal like stainless steel needs too much heat for charcoal powered forges to work. Bog iron is still being produced but of course in small amounts, enough though for the tools we will need.

In the future, the landfills will become valuable resource mines, millions of people will earn their living recycling material from those dumps just as people do now in 3rd world countries.

Now is the time to acquire those hand tools that will be valued after the end of cheap fuel as well as raw material to take to the black smith to make more tools. Open pollinated non GMO seeds and old fashioned farming knowledge will also be of great value.

The problem with charcoal is that it is easy to use up too much of the forests with it. This was a problem many years ago. I expect it would be even a bigger problem now, with a population of 7 billion.

Hi Gail, I also expect there to be far fewer people after the collapse. Resource wars, disease, starvation will greatly reduce our numbers. We have virulent diseases now that didn’t exist in the past & they are becoming immune to our antibiotics. I would not be surprised if some desperate nations resorted to biological warfare to reduce their competition for resources.

Yes, we will not be able to produce as much iron tools per person as in the past but once our numbers have crashed, there will be far fewer “consumers” of resources, fewer than in the 1400’s when europe went hunting for new lands to exploit.
If the american continents didn’t exist, then our population would be much smaller as the vast american forests, coal & minerals wouldn’t have been there to build the ships & power the forges of the european colonizers & war makers.
1400 europe was overpopulated, dirty & a dangerous environment for most people.
Millions of europeans left the old world to forcibly occupy the new thus reducing the stress on the resources of the old world.
Now there is no place left to escape to.

‘Lower Oil Prices, Despite Higher Extraction Costs’. The effect of diminishing returns. Something to watch will be the effect of lower oil prices on non-conventional extraction. The squeeze is on.

As an aside, my wife and I just took a 10 day vacation on the big island of Hawaii. We did some research while there on price and availability of different vacation rentals from the low priced VRBO (vacation rental by owner) to higher priced resort type units. What we found is the price ranges from where we stayed, a VRBO at about 100 a day to about 500 a day all the way up to 4500 a day. What we found immediately by checking these different options online was the most expensive/exclusive rooms were all booked for months in advance. The next tier down (500 a day) was well booked but vacancies were available. The lowest priced options (100-200 a day) had the most availability. Conclusion: The ‘Have’s’ are riding high while the have something’s are doing good enough to still take that kind of vacation. The flights were all booked solid in coach and close to full in economy plus and full in first class.

There were also two huge cruise liners that parked just outside of Kiluea-Kona with their patrons pouring into that side of Hawaii in shuttles to different venues. Whatever economic repercussions may be in the works via higher priced oil was not evident in Hawaii. Every parking lot and beach was full. Most restaurants were bustling.

As a self described peak oiliest I was astounded as to the extent of money being tossed around. There certainly is no economic backwash from higher oil prices yet that I can see on such a vacation, and that was in Nov., not July the high time of the season. No way will we fight those crowds in July.

If you get a VRBO in Hawaii, make sure they have AC. Ours didn’t and so we had to make sure to not be in the hotbox as I called it during the day from 11pm till sundown. Also make sure you bring your own mask and snorkel, and beach umbrella. Get a car rental and see the volcano Kilauea, Akaka falls, night swim with the Manta Rays and day kayak/swim with the wild dolphins in Capt. Cook’s cove. That was amazing to look down 50 feet or so and see them swimming along. An experience of a lifetime. One thing to see them above the water, but a whole different thing to see them underwater.

I enjoyed visiting the Big Island when I spoke there in 2008. I wrote about the Big Island in this Oil Drum post.

Most inhabitants don’t have air conditioning. The cost of electricity is very high, and the bills for air conditioning would contribute quite a bit to the cost of your stay there. I am afraid we are going to have to learn to live with a range our outdoor temperatures, without much temperature adjustment.

Thanks for the link. Yes, true, most locals do not have AC and have accustomed themselves to sleeping in a warm climate. I’m naturally geared for cooler temps, especially at night, so AC is a must in Hawaii. Only use a heater if it gets cooler than 58F inside. Guess we’ll be moving farther north if the climate warms too much here in No. CA or if electricity rates rise too much.

;) I go into a panic every time you write this. Here in New York State where is gets to -10 degrees. Even the native Americans had to heat. From Thomas Morton, Description of the Indians in New England (1637) “The fire is alwayes made in the midst of the house, with winde falls commonly: yet some times they fell a tree that groweth near the house, and, by drawing in the end thereof, maintaine the fire on both sides, burning the tree by Degrees shorter and shorter, untill it be all consumed; for it burneth night and day. Their lodging is made in three places of the house about the fire; they Iie upon plankes, commonly about a foote or 18 inches above the ground, raised upon railes that are borne up upon forks; they lay mats under them, and Coats of Deares skinnes, otters, beavers, Racoons, and of Beares hides, all which they have dressed and converted into good leather, with the haire on, for their coverings: and in this manner they liee as warme as they desire”.

I have no idea how we satisfy the heating needs of today’s large population, without either fossil fuels or deforesting the land. There were few enough Indians that they could light fires regularly. The other big need is for metals, and for concrete. They also require fossil fuels, or will result in deforesting the land. This is part of today’s big “oops.”

I think shortage of fuel for heating is part of the reason that population has to drop, so that those remaining can live reasonably comfortably. People have fought over scarce resources before, and will likely do so again.

Happily I own 6 acres of woodlot and have access to another 14 acres and an eighteen year old son and an ax. So, as long as the folks from New York City choose to walk south rather than north I am all set.

Hello, I came across this article about how they are planning to mass produce Hydrogen Powered SUV’s.

The problem is if they are using coal, oil or gas to make the Hydrogen, it serves no purpose and better just to have the car burn the gas/oil. Using coal or any fossil fuel to make Hydrogen is of no use.

If the Hydrogen was being generated with say A Thorium Power Station or Geothermal power plant, then that would be progress.

You would most likely need to finance one of these new cars for like ten years since they will surely be pricey.

Hi Gail, you mentioned where are they going to get the Hydrogen, the problem with that is that the current Natural Gas lines will eventually need to be replaced with a newer high tech probably some kind of carbon fiber or other tighter lines that can hold the smaller hydrogen particles, newer valves/tanks pipes and connectors and all of that will be needed, expensive – – but doable. Making Hydrogen with Coal or Oil/Gas is not the answer, I believe we can make it with thorium or cold fusion, Geothermal and and those subjects are something I plan to follow in the years ahead. If we fail in this, it could mean a massive calamity that many have predicted on this site.

Just some thoughts on that. Also do not forget that hydrogen can be absorbed into Hydride metals which are like sand and can be stored in boxes and it stays safe unless when heated then hydrogen is released.

The process of a car or other machine running could heat the box of the these metals containing hydrogen fuel more slowly and that could perhaps contain a bit of the volatility of this very hot and clean burning fuel.

The problem is we need to make it in clean way from a new technology like cold fusion or thorium not coal or gas because that would serve no purpose to battle the CO2 problems and resource scarcity in fossil fuels. This is the future I see if we do survive this upcoming oil and gas shortage and financial crisis which seem to be looming like a large Elephant in the Room.

My wife and I also honeymooned in Kauai. Our visit was to Poipu Beach Hotel back in 88. If you’re figuring that was your last flight due to economic problems on the horizon, I’d suggest simply living your life. The timing of major economic problems is difficult at best. It could be months, years or another decade or so. many factors are involved. Try the big island next time. Lot’s to see.

Gail, what is your view on the optimistic prognosis of the IEA (and EIA) on the future oilproduction of Brazil?
In their new World Energy Outlook (WEO 2013) the IEA-experts expect Brazil to produce 4.1 million barrels/ day in 2020 and even 6 million barrels/day in 2035.
The last 3 years Brazilian production has been struggling to keep flat at 2.2 million barrels.day.

Is the optimism real or is it aimed to lure investors to lend their capital to Petrobras? (blowing up the carbonbubble)
And why does the IEA still have any credibility in the case of Brazil? The agency has been overestimating Brazilian production for years.

These agencies clearly are being very optimistic. They need to come up with some worldwide numbers to “sell” to the world that look like it would be a good idea to conserve now, saying that if we don’t we might have a problem later. I expect that even if there were a high probability that the situation is actually far worse than that, they cannot mention the problem, because political leaders would be very unhappy.

I expect that they do not really understand that the oil problems and today’s financial problems are connected. Because of this, they may truly think that things have a way of bouncing back and getting better.

Hello, I guess it all comes down to world overpopulation which the easy energy has afforded us. It is amazing that we have actually almost wiped out Pacific Ocean Fisheries and have actually changed the Weather Worldwide.

It seems like this will continue for a time longer.

It would be nice if a whole fleet of Star Trek Space Ships like the Enterprise would start picking us up and delivering us to garden planets with abundant resources and live in love and in peace.

My point is we have few frontiers left like America was in the 1800’s when Europe was already getting crowded.

People may move north as the planet warms. but no sign of it now in Oregon as we have a cold snap coming our way, a blast of Alaskan air. Going to burn some firewood in the next week but we also burn natural gas, which I will miss if we cannot get it to help heat part of our home, our water, dryer, stove and heater. Natural gas and propane seem to be the best fuel we have now and it is still cheap, it can even run your car but it looks to run scarce in perhaps 10 years and get more expensive along with oil, I see kind of a slow squeeze of scarcity higher prices ahead not a sudden crisis unless something major happens, a huge Black Swan like an attack.

We do have lots of trees here and but they have cut many too, but enough for awhile to cheap firewood.

Many countries currencies may fail and even the USA which we know is the world reserve currency. But a new one will replace it as this has happened many times in history. If our USA Currency did fail and and a new one had to replace it kind of like when they made the Euro, those holding dollars would likely be the biggest losers, perhaps better to own not paper denominated assets. Not stocks but you know everyone is in them because they have been making money while other things like gold and silver have not done well this year, But I was thinking more about quality land with water and good community. Or investments in Farm lands with good water sources, the ones that are not in areas of over pumped aquifers which is so common these days as fresh water will also be a problem in the future and very soon.

Seriously, if humanity is to survive, whatever form of civilization survives will necessarily be much simpler, without middle-managers, hairdressers, bureaucrats, and other complications of an energy-rich civilization.

Hello Jan, That would be perfect! Unfortunately there are far to many of us now for everyone to be able to live in this way, if the Star Ships do not show up then those of us that are left alive after the Long Emergency will likely live in much this way. I think the Earth could support perhaps 300 million or so in this way — http://www.ecoreality.org/files/01,%20Fact%20Sheet.pdf

I just met my first grandson born in November and I wonder what is ahead for him….

Gail,
How do you see health care and insurance costs affecting disposable income and wages? We just got information on my husband’s employer provided health insurance rate changes for next year. Premiums went up 30%. Deductibles went up 50%. Out of pocket expenses are up significantly and will cap at $6,000 to $12,000 depending on in or out of network provider. Coverage went down. Now we pay 100% of bill until deductible is reached and then after than we pay 50% not 30%. I have heard that employee insurance plans went up significantly at the local university as well.
It seems that when I have gone to see the doctor the waiting rooms are empty, even at urgent care. It seems to me that even people who do have health insurance no longer go to the doctor unless it is an emergency, because their co-pay is becoming unaffordable. But people who can get health insurance do because they are afraid of bankruptcy if they don’t have it. I have read that the most common reason for bankruptcy is medical costs and that many still go bankrupt even with insurance coverage.
The doctors are charging higher and higher fees to cover their falling customer base. The insurance companies are rapidly inflating premiums and reducing coverage to maintain their profitability. The higher costs of insurance are forcing more people to take higher and higher deductibles, which makes them less likely to go to the doctor. And so the cycle keeps going.
It seems to me that Americans have actually reached the point where we can no longer afford our health care system. Just like oil prices being too high to afford, we are seeing health care too high to afford. What is your opinion of this?
Jody

I think you are right about health care costs now being higher than we as a nation can afford. It is not just a single problem that is easily fixed, though.

Part of the problem has to do with the food we are eating. It is over-processed, and includes too much high fructose corn syrup among other things. Restaurant portions are way too large. Cheap meals at McDonalds and other places are not very healthful.

Part of the problem has to do with the lack of exercise we are getting.

Part of the problem has to do with the disparity of wages, and lack of worthwhile jobs for many of the population. Without hope for success, there are too many who have metal health issues.

Part of the problem is that the healthcare system was put together with an idea of making a profit for many of the participants. This tempts doctors to over-use diagnostic machines they have purchased, and to prescribe pills that will need follow up, and to perform surgeries. Another part of the problem is very high fees for specialty physicians (that are justified by years and years of training and specialization).

Part of the problem is that doctors have been trained to think in terms of pills or surgeries as solutions, and not better diet or lifestyle.

Part of the problem is a parasite embedded in the system — the insurance industry. The US spends twice as much as other industrial nations to provide health care, 16%, versus about 7% in Canada, Germany, Japan, etc. A great deal of that overhead is due to the myriad complexities of the insurance industry.

Group health plans for reasonable size groups are actually fairly efficient in terms the percentage of the dollar spent on benefits. The percentage a person often sees is 80% of healthcare dollar goes for benefits, and less than 20% goes for other expenses. Many large employers more or less self-insure the costs for their employees, keeping their costs low. For individual health plans, expense ratios are higher. These would be a smaller percentage of the insured population, though.

Hello, Happy Thanksgiving to all the those that are in the USA. Today I was in a Safeway food store and the women told me she has to work on the holiday but with like almost 2.5 times her normal pay. Corporations are getting greedy and soon they will want everyone to work on Christmas, New Years etc. We have lost something here a respect for these holidays when people need time off. Who wants Pizza in the US on Thanksgiving anyway when we are eating turkey and stuffing etc.

A hundred years ago when Boss Tweed was mayor NYC built the reservoir up here (100 miles north of NYC). The rule was 50% for the project and 50% for graft. It seems Boss Tweed is alive and well and is CEO of an insurance company.

Gail and All,
I agree with you about the many parts of the problem. The industrial agriculture and processed food industries make large profits selling us food that makes us sicker and we become addicted to the sugar, fat, oil, and salt in them. Most American families think cheaper food is all they can afford. Many American families are constantly on the run so fast food seems logical. Elderly patients are on 12 to 20 prescriptions. Doctors gladly put us on prescriptions for life and just keep adding to them when we develop side affects. Specialists want ever larger salaries, and most doctors want to be specialists. People don’t seem to understand the relationship between health, diet, and exercise. Mental health is declining.

But if we can no longer afford physicians care or hospitalization the system is going to go bankrupt. Our government payments for medicare and medicaid seem to be propping up the system for now. Of all the problems we face it seems like this one should be fixable. We have plenty of people trained to provide these services. We have plenty of sick people. So we aren’t running out of supply or demand for medical services. What prevents the system from working like most businesses, when prices are too high and we have too much competition, we lose customers. The only choice we have is to lower prices and fight for customers. And competition eventually thins out those suppliers that can’t make it at lower prices. I don’t understand why the medical industry just keeps building more and more infrastructure and raising prices. As a business model it seems rather insane to me. It is like an out-of-control cancerous growth that is probably doing great harm to our economy. Healthcare and pharmaceutical costs are something like 24% of GDP.

When our government tried to fix healthcare by mandating that everyone had health insurance, why didn’t anyone point out the real problem? That costs are too high and they are out of line with the benefits. I agree with Edpell, it seems to have become extortion. When we need medical service we have no alternative but pay the price they are demanding. When we look at the problems of peak oil and climate change we seem to be facing dilemmas that have no solution. But medical care costs seems to be something we should be able to fix. And the high cost is breaking the back of our country.
Jody

Insurance has played an important role in the healthcare mess by separating patients from the cost of their treatment. Once this happened, competition stopped working. Insurers have tried to put in schedules of amounts they will pay for certain procedures, but this doesn’t necessarily stop doctors from performing more procedures.

According to a talk I heard by John Michael Greer, years ago “guilds” and “lodges” provided healthcare to their members, by hiring doctors (and hospitals?) to provide the service for members. The guilds or lodges could compare cost of services provided, and also could get feedback from their members as to whether the services provided were satisfactory. This system reportedly kept down costs of doctors, so doctors didn’t like it. It was perhaps easy to do without a lot of specialists.

I think Medicare has played an important role is cost escalation as well. The expectation is that health care system will keep a person alive indefinitely. For example, my father-in-law had brain surgery in his late 80s, because of tumors and the fact that my mother-in-law wanted the surgery for him. He spent many months afterward in a nursing home, but eventually recovered enough to go back to “assisted living” with her. Even after he recovered, he was confused mentally. For example, after my mother-in-law died, my father-in-law could not understand that fact–kept trying to look for her. In some sense, the surgery was a success, but the cost to society was high. It is hard to see that his quality of life was very good in his later years.

There is also an issue of fanciness of treatment. If there are “good,” “better,” and “best” treatments, with the “better” treatment perhaps costing 10 times the “good” testament, and the “best” treatment costing 10 times the “better” treatment, there is a tendency for the “best” treatment to become the standard, regardless of the extra cost involved, and regardless of how much true benefit it provides. For example, with treating broken bones, I am sure there are a range of treatments. In some severe breaks, perhaps the “best” treatment is mandated, but in the case of small cracks, it is hard to see that this is needed. But it does keep specialists occupied.

I was at a farm convention over the weekend. One day for lunch I sat at a table with a lot of public health people. As we sat eating our actual, real, food, the topic turned to Obamacare. The public health people were uniformly pessimistic and cynical. It’s all about money…nothing will be done which is actually useful. As to the question:

‘When our government tried to fix healthcare by mandating that everyone had health insurance, why didn’t anyone point out the real problem?’

Actually, there were hearings in the Senate. Three doctors testified in favor of preventive medicine rather than ‘after the fact’ medicine. A Senator from South Dakota sponsored them. They were ignored. When they finished testifying, they said something like ‘why don’t they do something that makes sense?’ and the sponsoring Senator said something like ‘this is Washington, what do you expect?’.

During the farm convention we heard a report from a diversified farm in Virginia. When the current managers took it over, it was in poor shape. The grazing lands had bare earth showing. They invested in keyline plowing. 18 months later their water infiltration had improved by a factor of 10X and their soil carbon had increased from 3.8 percent to 5.8 percent. Yet the current climate negotiators in Warsaw have decided that they don’t want to talk anymore to the ‘farm lobby’ which is there. If you can take carbon out of the air and put it in the soil in 18 months, why don’t the negotiators get excited? It all has to do with corporate profits. The farms are insignificant from a corporate standpoint. The technology used by the farms is very cheap. On the other hand, investing trillions in vaporware such as ‘clean coal’ is what governments do. Some corporations stand to make bales of money on something which doesn’t work, and the governments are geared to generate global agreements which will create a market for the vaporware.

My concern is that a collapse of the current system doesn’t lead anywhere good. We will have to build a new system, and building a new system usually starts from scratch. A new system from scratch may start without the elements we consider necessary, like electricity and a transportation system that works. We have never been in this situation before, so we don’t know exactly what happens.

My solution to those too big to eat restaurant meals is to bring a lidded container to put the extra portions in. That way I don’t stuff myself trying to avoid wasting food & I have something to eat later thanks to the microwave, at least for now. In the NW, we have hydropower & a smaller population. Because so many of us are loaded for bear, after the crash, folks trying to flee north will discover they are not welcome & might be met with a hail of lead/steel bullets/pellets.
One of the reasons in my opinion of so much processed food is it’s a way to extend the availability of “food” even though it’s not very good for us but it does produce PROFITS and that’s all that matters to the big corporate food industry.
That will all end with the end of cheap oil & transport.

Hello, What you mentioned earlier about getting started late to build things like the Thorium Power Stations, I agree these projects should have been started in the 1960’s or 1970’s at the latest, when we knew how… sadly political and special interests groups (i.e. Lobbyist) have stood in the way.

We are really a bit late to get started now, but I cannot offer any better choice and I believe we have a bit of time if we can get going now! It is important that the bulk of the remaining oil be saved for fertilizers, plastics and such. But sadly once again it looks like we are on a fast burn to use these precious resources before the next several generations,

I think we have one more generation at this speed, unless we embrace these new things which may save many of us.

If you have followed us for awhile on this group, these subjects have been much discussed. It is time to get going on this now we need to build these while we still have enough fossil fuels, otherwise the gift will be truly wasted.